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Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labor Market Reforms

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Author Info
Kugler, Adriana () (Universitat Pompeu Fabra, CEPR and IZA Bonn)
Jimeno, Juan F. (Universdad de Alcalá, FEDEA, CEPR and IZA Bonn)
Hernanz, Virginia (Universidad de Alcalá)

Additional information is available for the following registered author(s):

Abstract

Temporary employment contracts allowing unrestricted dismissals were introduced in Spain in 1984 and quickly came to account for most new jobs. As a result, temporary employment increased from around 10% in the mid-eighties to more than 30% in the early nineties. In 1997, however, the Spanish government attempted to reduce the incidence of temporary employment by reducing payroll taxes and dismissal costs for permanent contracts. In this paper, we use individual data from the Spanish Labor Force Survey to estimate the effects of reduced payroll taxes and dismissal costs on the distribution of employment and worker flows. We exploit the fact that recent reforms apply only to certain demographic groups to set up a natural experiment research design that can be used to study the effects of contract regulations. Our results show that the reduction of payroll taxes and dismissal costs increased the employment of young workers on permanent contracts. Results for older workers show insignificant effects. The results suggest a reasonably elastic response of permanent employment to nonwage labor costs for young workers. We also find positive effects on the transitions from unemployment and temporary employment into permanent employment for young and older workers, although the effects for older workers are not always significant. On the other hand, transitions from permanent employment to nonemployment increased only for older men, suggesting that the reform had little effect on dismissals.

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Publisher Info
Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 657.

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Length: 43 pages
Date of creation: Nov 2002
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Handle: RePEc:iza:izadps:dp657

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Related research
Keywords: temporary employment dismissal costs payroll taxes European unemployment

Other versions of this item:

Find related papers by JEL classification:
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs
J65 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment Insurance; Severance Pay; Plant Closings

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References listed on IDEAS
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