Working Paper: CEPR ID: DP3724
Authors: Adriana Kugler; Juan Francisco Jimeno-Serrano; Virginia Hernanz
Abstract: 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.
Keywords: dismissal costs; european unemployment; payroll taxes; temporary employment
JEL Codes: J23; J32; J38; J63; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in payroll taxes and dismissal costs (J32) | Probability of young men obtaining permanent contracts (J41) |
| Reduction in payroll taxes and dismissal costs (J32) | Probability of young women obtaining permanent contracts (J41) |
| Reduction in payroll taxes and dismissal costs (J32) | Transition from nonemployment to permanent employment for young men (J68) |
| Reduction in payroll taxes and dismissal costs (J32) | Transition from nonemployment to permanent employment for older men (J26) |
| Reduction in payroll taxes and dismissal costs (J32) | Transition from temporary to permanent employment for young workers (J63) |
| Reduction in payroll taxes and dismissal costs (J32) | Transition from permanent employment to nonemployment for older men (J26) |