Since the mid-1980s, Spain has gone from a very regulated labour market, with high
severance payments and high union bargaining power in wage determination, to a ‘dual
labour market’, in which permanent employees – around two-thirds of all employees –
enjoy the high protection and high bargaining power of the past, while temporary
employees – the remaining third – suffer from high turnover rates and low job tenure,
and are paid lower wages. Writing in the latest issue of the Economic Journal, Juan
Dolado, Carlos Garcia-Serrano and Juan Jimeno explore the lessons of this far from
ideal outcome of efforts to improve labour market flexibility.
In 1984, when the unemployment rate was over 20%, the Spanish government
liberalised the use of fixed-term employment contracts for regular productive
authorities, entailing much lower ‘firing costs’ than the ‘typical’ permanent employment
contract. The proportion of temporary employees in total salaried employment surged
very rapidly and has been above 30% since 1990.
Despite further labour market reforms during the 1990s aimed at reducing firing costs
for permanent employees and restricting the scope for using fixed-term contracts, the
proportion of temporary employment has not significantly decreased. During that
period, more than 90% of the new hires were under fixed-term contracts while other
types of temporary contacts and the duration of employment spells has very much
decreased.
What have been the consequences of the dual labour market that has emerged in
Spain? The research shows the following effects of fixed-term contracts:
?? a large increase in worker turnover;
?? a reduction in long-term unemployment;
?? a reduction in specific training offered by firms and a decrease in productivity;
?? a decline in regional migration and in the fertility rate;
?? a widening of the wage distribution, particularly among workers with tertiary
education;
?? and a neutral or slightly positive effect (a reduction) on unemployment.
Why has the high level of temporary employment persisted in spite of a series of
countervailing reforms to reduce the firing costs of permanent contracts and restrict the
use of temporary ones? The research finds contrasting behaviour between the private
sector where the share of temporary employment has decreased by about four
percentage points and the public sector where the share of temporary employment has
increased by about three percentage points.
The hiring practices of the public sector seem to be responsible for this different
behaviour and there are at least two explanations for it:
?? First, following fiscal consolidation after the Maastricht Treaty and the further
restrictions imposed by the Growth and Stability Pact, there have been so far strict
limits to hiring – for every four retirements in the public administration, only one new
permanent contract was allowed to be signed.
?? Second, a high proportion of European Union structural funds received by the local
and regional administrations for promoting ‘active labour market policies’ have been
used to hire workers in targeted groups (youths, female workers, the long-term
unemployed, etc.) under temporary contracts. To the extent that those contracts
help to improve the employability of those disfavoured groups, the still high share of
temporary employment may disguise some new favourable effects.
According to this review of the Spanish experience, it cannot be taken for granted that
liberalisation of temporary contracts improves the working of the labour market.
Together with the plausible benefits of higher ‘flexibility’, there may be perverse effects
on both efficiency and equity grounds. The most evident effects of the surge of
temporary employment are higher worker and job turnover rates, and lower
unemployment duration.
As for the unemployment rate, the evidence is more mixed. On the one hand, the lower
firing costs associated with fixed-term contracts seem to have contributed to
employment growth. On the other hand, there have been some unexpected negative
consequences stemming from the existence of a dual labour market: lower investment
in human capital, higher wage pressure, lower labour mobility and a larger wage
dispersion.
In fact, a symptom of the mixed blessings of temporary employment is the policy
reversals over employment protection legislation that have taken place in Spain since
the mid-1990s. Since then, the main goal of reform has been to reduce the share of
temporary contracts by cutting firing costs associated with new permanent contracts
applicable to targeted groups and subsidising both hires under permanent contracts
and the conversion of temporary employment into permanent employment via social
security contribution rebates.
ENDS
Notes for Editors: ‘Drawing Lessons from the Boom of Temporary Jobs in Spain’ by
Juan Dolado, Carlos Garcia-Serrano and Juan Jimeno is published in the June 2002
issue of the Economic Journal as part of a symposium on temporary work. Dolado is at
Universidad Carlos III; his co-authors are at Universidad de Alcala.
For Further Information: contact RES Media Consultant Romesh Vaitilingam on 0117-
983-9770 or 07768-661095 (email: romesh@compuserve.com); or Professor Juan
Dolado via email: dolado@eco.uc3m.es.