Labor market rigidities and economic efficiency: Evidence from Spain

Xulia González () and Daniel Miles-Touya

Labour Economics, 2012, vol. 19, issue 6, 833-845

Abstract: In the 1990s, Spain approved two labor reforms aimed at reducing the unemployment level and its volatility. Overall, these reforms involved two measures designed to induce firms to meet their labor needs via adjustment of permanent positions: restricting the use of temporary workers and reducing the amount of severance payments. This paper empirically assesses the impact of these reforms on the allocative efficiency of the labor input employing Petrin and Sivadasan's (2011) value of the marginal product-marginal cost gap methodology. We find a statistically significant increase in within-firm permanent labor gaps following the reforms. These results suggest that restrictions on the use of temporary workers (increasing the probability of hiring fragile workers for permanent positions), when coupled with uncertainty about enforcement of reduced severance payments, could more than offset the reduction in severance payments; hence, the net effect of the reforms could be to increase adjustment costs for permanent positions.

Keywords: Productivity; Dismissal costs; Temporary contracts; Labor market reforms (search for similar items in EconPapers)
JEL-codes: J23 J38 J41 L20 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:labeco:v:19:y:2012:i:6:p:833-845

DOI: 10.1016/j.labeco.2012.08.006

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