Labor contracts and flexibility: evidence from a labor market reform in Spain Articles uri icon

publication date

  • April 2014

start page

  • 930

end page

  • 957


  • 2


  • 52

International Standard Serial Number (ISSN)

  • 0095-2583

Electronic International Standard Serial Number (EISSN)

  • 1465-7295


  • This paper evaluates the effects of a labor market reform in Spain that removedrestrictions on fixed-term or temporary contracts. Our empirical results are based onlongitudinal firm-level data that cover observations before and after the reform. Weposit and estimate a dynamic labor demand model with indefinite and fixed-term laborcontracts, and a general structure of labor adjustment costs. Experiments using theestimated 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 permanentby temporary workers (i.e., a 10% decline in permanent employment). The effects onlabor productivity and the value of firms are very small. In contrast, a counterfactualreform that halved all firing costs would produce the same employment increase as theactual reform, but much larger improvements in productivity and in the value of firms.


  • Economics


  • job security provisions; employment protection; temporary jobs; firing costs; demand; models; adjustment; turnover; france; flows; jel:; j23; j32; j41