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The underestimated virtues of the two-sector AK model

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  • Gabriel J. Felbermayr
  • Omar Licandro

Abstract

Temporary employment contracts allowing unrestricted dismissals were introduced in Spain in 1984 and quickly came to account for most new jobs. 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 exploit the fact that recent reforms apply only to certain demographic groups to set up a natural experiment research design to study the effects of contract regulations on employment and worker flows. Using data from the Spanish Labor Force Survey, we find that the reduction of payroll taxes and dismissal costs increased the employment of young men and women on permanent contracts, although the effects for young women are marginally significant. The results suggest a moderately elastic response of permanent employment to non-wage labor costs. We also find positive effects on the transitions from unemployment and temporary employment into permanent employment for young and older workers and from permanent employment to non- employment only for older men, suggesting that the reform had little effect on dismissals.

Suggested Citation

  • Gabriel J. Felbermayr & Omar Licandro, "undated". "The underestimated virtues of the two-sector AK model," Working Papers 2003-13, FEDEA.
  • Handle: RePEc:fda:fdaddt:2003-13
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    References listed on IDEAS

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    1. Charles I. Jones, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 495-525.
    2. Boucekkine, Raouf & del Rio, Fernando & Licandro, Omar, 2005. "Obsolescence and modernization in the growth process," Journal of Development Economics, Elsevier, vol. 77(1), pages 153-171, June.
    3. Sharon G. Harrison, 2003. "Returns to Scale and Externalities in the Consumption and Investment Sectors," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 963-976, October.
    4. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    5. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    6. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, May.
    7. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
    8. Salvador Barrios & Eric Strobl, "undated". "Industry Mobility and Concentration in the European Union," Working Papers 2002-19, FEDEA.
    9. Restuccia, Diego & Urrutia, Carlos, 2001. "Relative prices and investment rates," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 93-121, February.
    10. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, vol. 87(3), pages 342-362, June.
    11. Dajin Li, 2002. "Is the AK model still alive? The long-run relation between growth and investment re-examined," Canadian Journal of Economics, Canadian Economics Association, vol. 35(1), pages 92-114, February.
    12. Hsieh, Chang-Tai, 2001. "Endogenous growth and obsolescence," Journal of Development Economics, Elsevier, vol. 66(1), pages 153-171, October.
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    Citations

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    Cited by:

    1. Gabriel J. Felbermayr, 2007. "Specialization on a technologically stagnant sector need not be bad for growth," Oxford Economic Papers, Oxford University Press, vol. 59(4), pages 682-701, October.
    2. Barañano, Ilaski & Romero-Ávila, Diego, 2015. "Long-term growth and persistence with obsolescence," Economic Modelling, Elsevier, vol. 51(C), pages 328-339.
    3. SimÛn Sosvilla Rivero & Oscar Bajo Rubio & Carmen DÌaz Rold·n, "undated". "Sobre la efectividad de la polÌtica regional comunitaria: El caso de Castilla-la Mancha," Studies on the Spanish Economy 178, FEDEA.
    4. Ana Balcao Reis & Joao Ejarque, 2005. "(Relative Price) Lessons from Taking an AK Model to the Data," 2005 Meeting Papers 312, Society for Economic Dynamics.
    5. Ejargque, Joao & McKnight, Stephen, 2006. "Can we identify the relative price between consumption and investment?," Economics Discussion Papers 8904, University of Essex, Department of Economics.
    6. D'Alessandro, Simone & Salvadori, Neri, 2008. "Pasinetti versus Rebelo: Two different models or just one?," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 547-554, March.
    7. Juan Prieto & Juan Gabriel Rodríguez & Rafael Salas, "undated". "Polarization, Inequality and Tax Reforms," Working Papers 2003-23, FEDEA.

    More about this item

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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