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

Abstract

This paper evaluates the effects on employment, job turnover and productivity of a labor market reform in Spain that eliminated dismissal costs for fixed-term contracts. Our empirical results are based on a panel of 2356 Spanish manufacturing firms for the period 1982-1993. We postulate and estimate a dynamic labor demand model with indefinite and fixed-term labor contracts. Our estimations use data on severance payments to identify when negative changes in employment have been associated with costly dismissals. Experiments using the estimated model show important positive effects of the reform on employment (between 2.5% and 4.5%) and job turnover (between five and seven percentage points). However, its effects on productivity and the value of a firm are negligible. This contrasts with the sizeable increases in output and v3.Iue under a hypothetical reduction in firing costs for all type of contracts. Compared with this alternative reform, the introduction of temporary contracts leads to excess turnover and employment of workers with low firm-specific experience.