DP3724 Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labour Market Reforms

Author(s): Virginia Hernanz, Juan F Jimeno, Adriana D. Kugler
Publication Date: January 2003
Keyword(s): Dismissal costs, european unemployment, payroll taxes, temporary employment
JEL(s): J23, J32, J38, J63, J65
Programme Areas: Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3724

Temporary employment contracts allowing unrestricted dismissals were introduced in Spain in 1984 and quickly came to account for most new jobs. In 1997, however, the Spanish government attempted to reduce the incidence of temporary employment by reducing payroll taxes and dismissal costs for permanent contracts. In this Paper, we exploit the fact that recent reforms apply only to certain demographic groups to set up a natural experiment research design to study the effects of contract regulations on employment and worker flows. Using data from the Spanish Labor Force Survey, we find that the reduction of payroll taxes and dismissal costs increased the employment of young men and women on permanent contracts, although the effects for young women are marginally significant. The results suggest a moderately elastic response of permanent employment to non-wage labour costs. We also find positive effects on the transitions from unemployment and temporary employment into permanent employment for young and older workers and from permanent employment to non-employment only for older men, suggesting that the reform had little effect on dismissals.