Publication: Labor contracts and flexibility : evidence from a labor market reform in Spain
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2009-02
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Abstract
This paper evaluates the effects of a labor market reform in Spain that removed restrictions on
fixed-term or temporary contracts. Our empirical results are based on longitudinal firm-level
data that covers observations before and after the reform. We posit and estimate a dynamic labor
demand model with indefinite and fixed-term labor contracts, and a general structure of labor
adjustment costs. Experiments using the estimated model show important positive effects of the
reform on total employment (i.e., a 3.5% increase) and job turnover. There is a strong
substitution of permanent by temporary workers (i.e., a 10% decline in permanent employment).
The effects on labor productivity and the value of firms are very small. In contrast, a
counterfactual reform that halved all firing costs would produce the same employment increase
as the actual reform, but much larger improvements in productivity and in the value of firms.
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Labor demand, Firing costs, Temporary contracts, Estimation of dynamic structural models