Labour Demand, Flexible Contracts and Financial Factors: Firm‐Level Evidence from Spain*

Andrew Benito () and Ignacio Hernando

Oxford Bulletin of Economics and Statistics, 2008, vol. 70, issue 3, 283-301

Abstract: We estimate models of labour demand for a panel of 3,400 Spanish manufacturing firms over the period 1985–2001. We examine the roles of fixed‐term contracts, financial factors and a policy reform in 1997 affecting permanent contracts by lowering payroll taxes and dismissal costs. Compared with permanent employment, the demand for flexible labour displays: (i) greater sensitivity to financial factors; (ii) greater cyclical sensitivity; (iii) a larger average wage elasticity; and (iv) less inertia. Our analysis of the 1997 policy reform suggests that a 5 percentage point reduction in the payroll tax is associated with an 8% increase in permanent labour demand.

Date: 2008
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