Labor Contracts and Flexibility: Evidence from a Labor Market Reform in Spain

Economic Inquiry, 52 (April 2014), 930-957.

28 Pages Posted: 5 Jul 1999 Last revised: 30 Oct 2016

See all articles by Victor Aguirregabiria

Victor Aguirregabiria

University of Toronto - Department of Economics

Cesar Alonso-Borrego

Universidad Carlos III de Madrid - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2014

Abstract

This paper evaluates the effects on employment, job turnover and productivity of a labor market reform in Spain that eliminated dismissal costs for fixed-term or temporary contracts. Our empirical results are based on a panel of 2356 Spanish manufacturing firms for the period 1982-1993. We postulate and estimate a dynamic labor demand model with indefinite and fixed-term labor contracts, and a general structure of labor adjustment costs. Experiments using the estimated model show important positive effects of the reform on total employment (i.e., a 3.5% increase) and job turnover. There is a strong substitution of permanent by temporary workers (i.e., a 10% decline in permanent employment). The effects on labor productivity and the value of a firm are very small. These effects contrast with the ones of a counterfactual reform consisting in halving firing costs of all type of contracts. That policy implies the same increase in total employment, but much larger improvements in productivity, and the value of firms.

Keywords: Labor demand, Firing costs, Temporary contracts, Estimation of dynamic structural models

JEL Classification: J23, J32, J38, J41

Suggested Citation

Aguirregabiria, Victor and Alonso-Borrego, Cesar, Labor Contracts and Flexibility: Evidence from a Labor Market Reform in Spain (April 1, 2014). Economic Inquiry, 52 (April 2014), 930-957.. Available at SSRN: https://ssrn.com/abstract=156451 or http://dx.doi.org/10.2139/ssrn.156451

Victor Aguirregabiria (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
4169784358 (Phone)

HOME PAGE: http://individual.utoronto.ca/vaguirre/

Cesar Alonso-Borrego

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34 91 6249749 (Phone)
+34 91 6249849 (Fax)

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