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The effects of introducing a single open-ended contract in the Spanish labour market

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  • Jose Ignacio García Pérez

    () (Department of Economics, Universidad Pablo de Olavide & FEDEA)

  • Victoria Osuna

    () (Department of Economics, Universidad Pablo de Olavide)

Abstract

This paper quantifies the effects of introducing a single open-ended contract for new hires, with increasing severance payments as an alternative to the current situation in Spain, where both temporary and permanent contracts are available. One of the reasons for the excessive job destruction in this economy is the intensive use of temporary contracts. The main driving force behind firm behaviour is the large gap in severance payments between temporary and permanent contracts (8 vs. 45 days of wages per year of seniority). We use a search and matching type model of job creation and destruction that is able to generate the main properties of a segmented labour market like the Spanish one. We use this model to simulate the effects of introducing this new design in severance payments. Our results show that this contract decreases unemployment (by 21%) and job destruction (which is almost halved in contracts with a tenure of fewer than four years) and tempers both the probability of being fired and tenure distribution as severance payments are reduced. Almost 15% more workers have a tenure of more than 3 years, and there are 23% fewer one-year contracts. The transition shows that the single open-ended contract would be highly beneficial for a majority of workers (only 8% would be jeopardised) because job stability would substantially increase. Firms, would also benefit from a reduction in their expected severance costs by about 9%.

Suggested Citation

  • Jose Ignacio García Pérez & Victoria Osuna, 2011. "The effects of introducing a single open-ended contract in the Spanish labour market," Working Papers 11.07, Universidad Pablo de Olavide, Department of Economics.
  • Handle: RePEc:pab:wpaper:11.07
    as

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    File URL: http://www.upo.es/serv/bib/wps/econ1107.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Siassi, Nawid & Dolado, Juan J. & Lalé, Etienne, 2015. "Moving Towards a Single Labor Contract: Transition vs. Steady State," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112858, Verein für Socialpolitik / German Economic Association.
    2. 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.
    3. Dolado, Juan J. & Lalé, Etienne & Siassi, Nawid, 2016. "From Dual to Unified Employment Protection: Transition and Steady State," IZA Discussion Papers 9953, Institute for the Study of Labor (IZA).
    4. 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.
    5. Lídia Farré & Núria Rodríguez-Planas, 2014. "Immigrants from eastern partnership (EaP) countries in Spain," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-28, December.
    6. Indermit Gill & Johannes Koettl & Truman Packard, 2013. "Full employment: a distant dream for Europe," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-34, December.

    More about this item

    Keywords

    Single Contract; Permanent and Temporary contracts; Severance Payments; Job seniority; Tenure distribution; Job destruction.;

    JEL classification:

    • 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
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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