Labor contracts and flexibility: evidence from a labor market reform in Spain

Victor Aguirregabiria () and César Alonso-Borrego ()

Economics Working Papers from Universidad Carlos III, Departamento de Economía

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 covers 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.

Keywords: Labor demand; Firing costs; Temporary contracts; Estimation of dynamic structural models (search for similar items in EconPapers)
JEL-codes: J23 J32 J38 J41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab
Date: Written
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Related works:
Working Paper: Labor Contracts and Flexibility: Evidence from a Labor Market Reform in Spain (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:cte:werepe:we091811

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