Does limiting temporary work improve employment stability? Evidence for young workers in Spain

The latest labor market reform in Spain, approved in December 2021, introduced unprecedented restrictions on the use of temporary contracts. This paper uses administrative records from the Continuous Sample of Working Lives (MCVL) to examine the reform’s impact on the quality of contracts and the labor market outcomes for young labor market entrants. The empirical strategy relies on a difference-in-differences design that exploits persistent differences in the prevalence of temporary employment at the provincial level. To this end, we construct a novel indicator that takes into account the sectoral composition of employment in each province. The results show that the reform substantially increased the probability of entrants accessing the labor market through an open-ended contract. This almost eliminated the pre-existing differences in this outcome between entrants in provinces with a high or low prevalence of temporary employment prior to the reform. In contrast, the reductions in the corresponding gaps in employment duration and earnings are much more modest. We attribute these differences to the decline in the duration of regular open-ended jobs following the reform, which was more pronounced in the provinces with a high prevalence of temporary employment prior to the reform.