IDEAS home Printed from https://ideas.repec.org/p/fda/fdaddt/2012-09.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • J. Ignacio García Pérez & Victoria Osuna, 2012. "Dual Labour Markets and the Tenure Distribution: Reducing Severance Pay or Introducing a Single Contract?," Working Papers 2012-09, FEDEA.
  • Handle: RePEc:fda:fdaddt:2012-09
    as

    Download full text from publisher

    File URL: https://documentos.fedea.net/pubs/dt/2012/dt-2012-09.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Alonso-Borrego, César & Fernández-Villaverde, Jesús & Galdon-Sanchez, Jose Enrique, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," IZA Discussion Papers 1129, Institute of Labor Economics (IZA).
    3. Samuel Bentolila & Juan J. Dolado & Pierre Cahuc & Thomas Le Barbanchon, 2010. "Two-Tier Labor Markets in the Great Recession: France Vs. Spain," Working Papers wp2010_1009, CEMFI.
    4. 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.
    5. Aitor Lacuesta & Sergio Puente & Ernesto Villanueva, 2020. "The schooling response to a sustained increase in low-skill wages: evidence from Spain 1989–2009," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 11(4), pages 457-499, December.
    6. Garibaldi, Pietro, 1998. "Job flow dynamics and firing restrictions," European Economic Review, Elsevier, vol. 42(2), pages 245-275, February.
    7. Edward P. Lazear, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 699-726.
    8. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," Review of Economic Studies, Oxford University Press, vol. 57(3), pages 381-402.
    9. Samuel Bentolila & Juan Jose Dolado & Juan F. Jimeno, 2008. "Two-tier Employment Protection Reforms: The Spanish Experience," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 6(04), pages 49-56, December.
    10. Tito Boeri & J. Ignacio Conde-Ruiz & Vincenzo Galasso, 2012. "The Political Economy Of Flexicurity," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 684-715, August.
    11. Cecilia Albert & Carlos García-Serrano & Virginia Hernanz, 2004. "Firm-provided training and temporary contracts," Spanish Economic Review, Springer;Spanish Economic Association, vol. 7(1), pages 67-88, January.
    12. Samuel Bentolila & Juan Jose Dolado & Juan F. Jimeno, 2008. "Two-tier Employment Protection Reforms: The Spanish Experience," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 6(4), pages 49-56, December.
    13. Fabio Berton & Pietro Garibaldi, 2012. "Workers and Firms Sorting into Temporary Jobs," Economic Journal, Royal Economic Society, vol. 122(562), pages 125-154, August.
    14. Giorgio Brunello & Pietro Garibaldi & Etienne Wasmer, 2007. "Education and training in Europe," SciencePo Working papers Main hal-03415950, HAL.
    15. Victor Aguirregabiria & Cesar Alonso-Borrego, 2014. "Labor Contracts And Flexibility: Evidence From A Labor Market Reform In Spain," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 930-957, April.
    16. J. Ignacio García-Pérez & Yolanda F. Rebollo Sanz, 2009. "The use of permanent contracts across Spanish regions: Do regional wage subsidies work?," Investigaciones Economicas, Fundación SEPI, vol. 33(1), pages 97-130, January.
    17. Guell, Maia & Petrongolo, Barbara, 2007. "How binding are legal limits? Transitions from temporary to permanent work in Spain," Labour Economics, Elsevier, vol. 14(2), pages 153-183, April.
    18. Juan J. Dolado & Salvador Ortigueira & Rodolfo Stucchi, 2016. "Does dual employment protection affect TFP? Evidence from Spanish manufacturing firms," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(4), pages 421-459, November.
    19. 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.
    20. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    21. Osuna Victoria, 2005. "The Effects of Reducing Firing Costs in Spain: A Lost Opportunity?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-29, May.
    22. Dolado, Juan J. & Stucchi, Rodolfo, 2008. "Do Temporary Contracts Affect TFP? Evidence from Spanish Manufacturing Firms," IZA Discussion Papers 3832, Institute of Labor Economics (IZA).
    23. Tauchen, George, 1986. "Statistical Properties of Generalized Method-of-Moments Estimators of Structural Parameters Obtained from Financial Market Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(4), pages 397-416, October.
    24. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    25. Cole, Harold L & Rogerson, Richard, 1999. "Can the Mortensen-Pissarides Matching Model Match the Business-Cycle Facts?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 933-959, November.
    26. Claudio Michelacci & Josep Pijoan-Mas, 2012. "Intertemporal Labour Supply with Search Frictions," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 899-931.
    27. Tauchen, George, 1986. "Statistical Properties of Generalized Method-of-Moments Estimators of Structural Parameters Obtained from Financial Market Data: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(4), pages 423-425, October.
    28. Osune, Victoria, 2014. "Working-week flexibility: Implications for employment and productivity," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-29.
    29. John A. Abowd & Thomas Lemieux, 1993. "The Effects of Product Market Competition on Collective Bargaining Agreements: The Case of Foreign Competition in Canada," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 983-1014.
    30. James Costain & Juan F. Jimeno & Carlos Thomas, 2010. "Employment fluctuations in a dual labour market," Economic Bulletin, Banco de España, issue APR, pages 129-137, April.
    31. O Blanchard & A Landier, 2002. "The Perverse Effects of Partial Labour Market Reform: fixed--Term Contracts in France," Economic Journal, Royal Economic Society, vol. 112(480), pages 214-244, June.
    32. Bassanini, Andrea & Booth, Alison L. & Brunello, Giorgio & De Paola, Maria & Leuven, Edwin, 2005. "Workplace Training in Europe," IZA Discussion Papers 1640, Institute of Labor Economics (IZA).
    33. 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.
    34. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627, Elsevier.
    35. Samuel Bentolila & Juan J. Dolado, 1994. "Labour Flexibility and Wages: Lessons from Spain," Working Papers wp1994_9406, CEMFI.
    36. repec:ces:ifodic:v:6:y:2008:i:4:p:14567215 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pierre Cahuc & Olivier Charlot & Franck Malherbet & Helène Benghalem & Emeline Limon, 2020. "Taxation of Temporary Jobs: Good Intentions with Bad Outcomes?," The Economic Journal, Royal Economic Society, vol. 130(626), pages 422-445.
    2. Joshua Haist & Lukáš Novotný, 2023. "Moving across Borders: The Work Life Experiences of Czech Cross‐border Workers during the COVID‐19 Pandemic," Journal of Common Market Studies, Wiley Blackwell, vol. 61(1), pages 124-142, January.
    3. Juan J. Dolado & Etienne Lalé & Nawid Siassi, 2021. "From dual to unified employment protection: Transition and steady state," Quantitative Economics, Econometric Society, vol. 12(2), pages 547-585, May.
    4. Siassi, Nawid & Dolado, Juan J. & Lalé, Etienne, 2015. "Moving Towards a Single Labor Contract: Transition vs. Steady State," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112858, Verein für Socialpolitik / German Economic Association.
    5. Bentolila, Samuel & Dolado, Juan J. & Jimeno, Juan F., 2019. "Dual Labour Markets Revisited," IZA Discussion Papers 12126, Institute of Labor Economics (IZA).
    6. Victoria Osuna & José Ignacio García Pérez, 2021. "Temporary layoffs, short-time work and COVID-19: the case of a dual labour market," Applied Economic Analysis, Emerald Group Publishing Limited, vol. 30(90), pages 248-262, December.
    7. Victoria Osuna & J. García-Pérez, 2015. "On the Effectiveness of Short-time Work Schemes in Dual Labor Markets," De Economist, Springer, vol. 163(3), pages 323-351, September.
    8. J. Ignacio García Pérez, 2015. "Should severance pay be consistent for all workers?," IZA World of Labor, Institute of Labor Economics (IZA), pages 174-174, August.
    9. Marta Silva & Luis Filipe Martins & Helena Lopes, 2015. "Asymmetric labour market reforms and wage growth with fixed-term contracts: does learning about match quality matter?," Working Papers Series 2 15-04, ISCTE-IUL, Business Research Unit (BRU-IUL).
    10. Makoto Masui, 2020. "The determinants of employers’ use of temporary contracts in the frictional labor market," Metroeconomica, Wiley Blackwell, vol. 71(4), pages 803-834, November.
    11. Osuna, Victoria, 2015. "Reducing severance costs or subsidizing permanent job creation: Which policy is more effective to reduce duality?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 9, pages 1-35.
    12. García-Cintado, Alejandro & Romero-Ávila, Diego & Usabiaga, Carlos, 2015. "Can the hysteresis hypothesis in Spanish regional unemployment be beaten? New evidence from unit root tests with breaks," Economic Modelling, Elsevier, vol. 47(C), pages 244-252.
    13. Vicente Núñez-Antón & Juan Manuel Pérez-Salamero González & Marta Regúlez-Castillo & Carlos Vidal-Meliá, 2020. "Improving the Representativeness of a Simple Random Sample: An Optimization Model and Its Application to the Continuous Sample of Working Lives," Mathematics, MDPI, vol. 8(8), pages 1-27, July.
    14. Bertoni, Marco & Chinetti, Simone & Nistico, Roberto, 2023. "Employment Protection, Job Insecurity, and Job Mobility," IZA Discussion Papers 16647, Institute of Labor Economics (IZA).
    15. Osune, Victoria, 2014. "Working-week flexibility: Implications for employment and productivity," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-29.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Victoria Osuna & Jose-Ignacio García-Pérez, 2012. "The effects of introducing a single open-ended contract in Spain," EcoMod2012 3825, EcoMod.
    2. Bentolila, Samuel & Dolado, Juan J. & Jimeno, Juan F., 2019. "Dual Labour Markets Revisited," IZA Discussion Papers 12126, Institute of Labor Economics (IZA).
    3. Victoria Osuna & J. García-Pérez, 2015. "On the Effectiveness of Short-time Work Schemes in Dual Labor Markets," De Economist, Springer, vol. 163(3), pages 323-351, September.
    4. Alvarez, Fernando & Veracierto, Marcelo, 2012. "Fixed-term employment contracts in an equilibrium search model," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1725-1753.
    5. John Martin & Stefano Scarpetta, 2012. "Setting It Right: Employment Protection, Labour Reallocation and Productivity," De Economist, Springer, vol. 160(2), pages 89-116, June.
    6. Alonso-Borrego, César & Fernández-Villaverde, Jesús & Galdon-Sanchez, Jose Enrique, 2004. "Evaluating Labor Market Reforms: A General Equilibrium Approach," IZA Discussion Papers 1129, Institute of Labor Economics (IZA).
    7. Hector Sala & José I. Silva & Manuel Toledo, 2012. "Flexibility at the Margin and Labor Market Volatility in OECD Countries," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 991-1017, September.
    8. Pierre Cahuc & Olivier Charlot & Franck Malherbet, 2016. "Explaining The Spread Of Temporary Jobs And Its Impact On Labor Turnover," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(2), pages 533-572, May.
    9. Garcia-Louzao, Jose & Hospido, Laura & Ruggieri, Alessandro, 2023. "Dual returns to experience," Labour Economics, Elsevier, vol. 80(C).
    10. Juan J. Dolado & Salvador Ortigueira & Rodolfo Stucchi, 2016. "Does dual employment protection affect TFP? Evidence from Spanish manufacturing firms," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(4), pages 421-459, November.
    11. Samuel Bentolila & Juan Dolado & Juan Jimeno, 2012. "Reforming an insider-outsider labor market: the Spanish experience," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 1(1), pages 1-29, December.
    12. Victoria Osuna & José Ignacio García Pérez, 2021. "Temporary layoffs, short-time work and COVID-19: the case of a dual labour market," Applied Economic Analysis, Emerald Group Publishing Limited, vol. 30(90), pages 248-262, December.
    13. Osuna, Victoria, 2015. "Reducing severance costs or subsidizing permanent job creation: Which policy is more effective to reduce duality?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 9, pages 1-35.
    14. Andrea Vindigni & Simone Scotti & Cristina Tealdi, 2015. "Uncertainty and the Politics of Employment Protection," Journal of Labor Economics, University of Chicago Press, vol. 33(1), pages 209-267.
    15. Berton, Fabio & Migheli Matteo, 2015. "Estimating the marginal rate of substitution between wage and employment protection," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201529, University of Turin.
    16. Charlot, Olivier & Malherbet, Franck, 2010. "Education and the Welfare Gains from Employment Protection," IZA Discussion Papers 4799, Institute of Labor Economics (IZA).
    17. Héctor Sala & José I. Silva, 2009. "Flexibility at the margin and labour market volatility: The case of Spain," Investigaciones Economicas, Fundación SEPI, vol. 33(2), pages 145-178, May.
    18. Charlot, Olivier & Malherbet, Franck, 2013. "Education and employment protection," Labour Economics, Elsevier, vol. 20(C), pages 3-23.
    19. González, Xulia & Miles-Touya, Daniel, 2012. "Labor market rigidities and economic efficiency: Evidence from Spain," Labour Economics, Elsevier, vol. 19(6), pages 833-845.
    20. Rodríguez Mora, José V & Güell, Maia, 2010. "Temporary Contracts, Incentives and Unemployment," CEPR Discussion Papers 8116, C.E.P.R. Discussion Papers.

    More about this item

    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; Retirement Plans; Private Pensions
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fda:fdaddt:2012-09. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Carmen Arias (email available below). General contact details of provider: https://www.fedea.net .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.