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

28 Pages Posted: 26 Feb 2014

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 2014

Abstract

This paper evaluates the effects of a labor market reform in Spain that removed restrictions on fixed‐term or temporary contracts. Our empirical results are based on longitudinal firm‐level data that cover observations before and after the reform. We posit 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 firms are very small. In contrast, a counterfactual reform that halved all firing costs would produce the same employment increase as the actual reform, but much larger improvements in productivity and in the value of firms.

JEL Classification: J23, J32, J41

Suggested Citation

Aguirregabiria, Victor and Alonso-Borrego, Cesar, Labor Contracts and Flexibility: Evidence from a Labor Market Reform in Spain (April 2014). Economic Inquiry, Vol. 52, Issue 2, pp. 930-957, 2014. Available at SSRN: https://ssrn.com/abstract=2401417 or http://dx.doi.org/10.1111/ecin.12077

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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