The Effects of Reducing Firing Costs in Spain: A Lost Opportunity?

Victoria Osuna

The B.E. Journal of Macroeconomics, 2005, vol. 5, issue 1, 29

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.

Keywords: Firing costs; temporary employment; job creation; job destruction; job conversion; segmented labor markets (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (16)

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DOI: 10.2202/1534-6005.1193

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