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Dual Labour Markets and the Tenure Distribution: Reducing Severance Pay or Introducing a Single Contract?

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  • J. Ignacio García Pérez
  • Victoria Osuna

Abstract

This paper evaluates Spain's recent labour market reform concerning the reduction in severance pay from 45 to 33 days of wages per year of seniority and the introduction of a new subsidized permanent contract. We also compare this policy with the introduction of a single open-ended labour contract with increasing severance payments for all new hirings. We use an equilibrium search and matching model to generate the main properties of this segmented labour market. Our steady {state results show this reform will reduce unemployment (by 20%) and job destruction (by 29%). However, in terms of wage subsidies, the cost of implementing this reform will be very high. A cheaper and more effective way to decrease the duality in the labour market would be to eliminate temporary contracts and introduce a single contract. Unemployment and job destruction in this case would be reduced by 28% and 42%, respectively. Most interestingly, tenure distribution would be even smoother than under the designed reform: 21% more workers would end up having tenures of more than three years, and there would be 32% fewer one year contracts. The transition shows that both changes would benefit a majority of workers: only 8.1% would be jeopardized under the approved reform (5.8% in the transition to the single contract) due to improvement in job stability.

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Bibliographic Info

Paper provided by FEDEA in its series Working Papers with number 2012-09.

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Date of creation: Oct 2012
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Handle: RePEc:fda:fdaddt:2012-09

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  1. James Costain & Juan F. Jimeno & Carlos Thomas, 2010. "Employment fluctuations in a dual labor market," Banco de Espa�a Working Papers 1013, Banco de Espa�a.
  2. César Alonso-Borrego & Jesús Fernández-Villaverde & José E. Galdón-Sánchez, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," PIER Working Paper Archive 04-016, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Victor Aguirregabiria & Cesar Alonso-Borrego, 2009. "Labor Contracts and Flexibility: Evidence from a Labor Market Reform in Spain," Working Papers tecipa-346, University of Toronto, Department of Economics.
  4. Aitor Lacuesta & Sergio Puente & Ernesto Villanueva, 2011. "The schooling response to a sustained increase in low-skill wages: evidence from Spain 1989-2009," Banco de Espa�a Working Papers 1208, Banco de Espa�a.
  5. Yolanda Rebollo Sanz & Jose Ignacio García Pérez, 2007. "The use of permanent contracts across Spanish regions: Do regional wage subsidies work?," Working Papers 07.06, Universidad Pablo de Olavide, Department of Economics.
  6. Carlos Díaz-Moreno & José E. Galdón-Sánchez, 1999. "How important is firm behavior to understand unemployment? Evidence from Spain," Investigaciones Economicas, Fundación SEPI, vol. 23(2), pages 203-224, May.
  7. Dolado, Juan J. & Stucchi, Rodolfo, 2008. "Do Temporary Contracts Affect TFP? Evidence from Spanish Manufacturing Firms," IZA Discussion Papers 3832, Institute for the Study of Labor (IZA).
  8. Samuel Bentolila & Pierre Cahuc & Juan Jose Dolado & Thomas Le Barbanchon, 2010. "Two-Tier Labor Markets in the Great Recession: France vs. Spain," CESifo Working Paper Series 3269, CESifo Group Munich.
  9. Cabrales, Antonio & Hopenhayn, Hugo A., 1997. "Labor-market flexibility and aggregate employment volatility," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 46(1), pages 189-228, June.
  10. Juan F. Jimeno & Luis Toharia, 1993. "The effects of fixed-term employment on wages: theory and evidence from Spain," Investigaciones Economicas, Fundación SEPI, vol. 17(3), pages 475-494, September.
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Cited by:
  1. Osuna, Victoria, 2013. "Working-week flexibility: Implications for employment and productivity," Economics Discussion Papers 2013-27, Kiel Institute for the World Economy.

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