Job flow dynamics is segmented labor markets: the effects of a reduction in firing consts in Spain

Abstract

This paper proposes a model of job creation and destruction of the search and matching type. The model is able to replicate the magnitude and cyclical behavior of job creation, destruction and reallocation rates in a segmented labor market like the one in Spain. The motivation is the similarity in the cyclical behavior of US and Spanish job reallocation (JR) rates despite the differences in job security regulations. This behavior contrasts to what is observed in the rest of continental Europe, where JR is acyclical. The model, by introducing a segmented labor market, makes is plausible to obtain a countercyclical JR rate in a high firing cost economy. In addition, we quantify the effects of a 40 % reduction in the firing costs associated with permanent contracts. The main results are (i) negligible effects on permanent job destruction rates, (ii) significant effects on job creation and destruction (permanetltemporary) cyclical behavior, (iii) a 57 % increase in the job conversion rate from temporary into permanetjobs and a 12 % reduction in the temporary employment rate.