Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labor Market Reforms

43 Pages Posted: 6 Feb 2003  

Adriana D. Kugler

McCourt School of Public Policy ; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics; National Bureau of Economic Research (NBER)

Juan F. Jimeno

Banco de España - Research Department; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Virginia Hernanz

Universidad de Alcala de Henares - Department of Economic Analysis and Economic History

Date Written: November 2002

Abstract

Temporary employment contracts allowing unrestricted dismissals were introduced in Spain in 1984 and quickly came to account for most new jobs. As a result, temporary employment increased from around 10% in the mid-eighties to more than 30% in the early nineties. In 1997, however, the Spanish government attempted to reduce the incidence of temporary employment by reducing payroll taxes and dismissal costs for permanent contracts. In this paper, we use individual data from the Spanish Labor Force Survey to estimate the effects of reduced payroll taxes and dismissal costs on the distribution of employment and worker flows. We exploit the fact that recent reforms apply only to certain demographic groups to set up a natural experiment research design that can be used to study the effects of contract regulations. Our results show that the reduction of payroll taxes and dismissal costs increased the employment of young workers on permanent contracts. Results for older workers show insignificant effects. The results suggest a reasonably elastic response of permanent employment to nonwage labor costs for young workers. We also find positive effects on the transitions from unemployment and temporary employment into permanent employment for young and older workers, although the effects for older workers are not always significant. On the other hand, transitions from permanent employment to nonemployment increased only for older men, suggesting that the reform had little effect on dismissals.

Keywords: Temporary Employment, Dismissal Costs, Payroll Taxes, European Unemployment

JEL Classification: J23, J32, J38, J63, J65

Suggested Citation

Kugler, Adriana D. and Jimeno, Juan F. and Hernanz, Virginia, Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labor Market Reforms (November 2002). IZA Discussion Paper No. 657; Universitat Pompeu Fabra, Economics and Business Working Paper No. 651. Available at SSRN: https://ssrn.com/abstract=372463

Adriana Debora Kugler (Contact Author)

McCourt School of Public Policy ( email )

3700 O ST NW
311 Old North
Washington, DC 20057
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Juan F. Jimeno

Banco de España - Research Department ( email )

Alcala 48
28014 Madrid
Spain

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Virginia Hernanz Martín

Universidad de Alcala de Henares - Department of Economic Analysis and Economic History ( email )

Pza de la Victoria
Madrid, 28801-Alcala de Henares
Spain

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