A BEJM Contributions article.

Abstract

In the mid 80's, many European countries liberalized the use of fixed-term (temporary) contracts in order to lower firm's non-wage labor costs, instead of reducing firing costs associated with indefinite duration (permanent) contracts. This policy generated segmented labor markets. The Spanish case is the most striking, with a share of temporary employment of 33% by the mid 90's. Since then, several reforms have been suggested and in this paper I quantify some of their effects. First, I build a model of job creation and destruction of the search and matching type that is able to generate the main properties of a segmented labor market like the Spanish one. Then, I use his model to quantify the effects of removing procedural wages, and further reductions in firing costs associated with permanent contracts. The main results are: (i) a small increase in permanent job destruction, (ii) a significant reduction in temporary job destruction, mainly driven by the increase in job conversions from temporary contracts into permanent ones, and (iii) a significant reduction in labor market segmentation measured as the reduction in the wage gap of temporary versus permanent workers.

Submitted: January 2, 2004 · Accepted: April 14, 2005 · Published: May 6, 2005

Originally published in Contributions to Macroeconomics.

Recommended Citation

Osuna, Victoria (2005) "The Effects of Reducing Firing Costs in Spain: A Lost Opportunity?," Contributions to Macroeconomics: Vol. 5 : Iss. 1, Article 5.
Available at: http://www.bepress.com/bejm/contributions/vol5/iss1/art5