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Dual labour markets and the tenure distribution: Reducing severance pay or introducing a single contract

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  • Ignacio García Pérez, J.
  • Osuna, Victoria
Abstract
This paper evaluates Spain's 2012 labour market reform concerning the reduction in severance pay from 45 to 33days of wages per year of seniority and the introduction of a new subsidised permanent contract. We also compare this policy with the introduction of a single open-ended labour contract with increasing severance payments for all new hires. We use an equilibrium search and matching model to generate the main properties of this segmented labour market. Our steady-state results show that this reform will reduce unemployment (by 10.5%) and job destruction (by 7.5%). However, in terms of wage subsidies, the cost of implementing this reform will be very high. A cheaper and more effective way to decrease the duality in the labour market could be to eliminate temporary contracts and introduce a single contract. Unemployment and job destruction in this case could be reduced by 31.5% and 35%, respectively. Most interestingly, tenure distribution could be even smoother than under the designed reform, as 22.5% more workers could have tenures of more than three years and there could be 38.5% fewer one-year contracts. The transition shows that both policy measures would benefit a majority of workers: only 7.4% would experience a decrease in tenure under the approved reform (5.5% in the transition to the single contract) due to the improvement in job stability.

Suggested Citation

  • Ignacio García Pérez, J. & Osuna, Victoria, 2014. "Dual labour markets and the tenure distribution: Reducing severance pay or introducing a single contract," Labour Economics, Elsevier, vol. 29(C), pages 1-13.
    • Handle: RePEc:eee:labeco:v:29:y:2014:i:c:p:1-13
    DOI: 10.1016/j.labeco.2014.05.001
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    2. Siassi, Nawid & Dolado, Juan J. & Lalé, Etienne, 2015. "Moving Towards a Single Labor Contract: Transition vs. Steady State," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112858, Verein für Socialpolitik / German Economic Association.
    3. Victoria Osuna & José Ignacio García Pérez, 2021. "Temporary layoffs, short-time work and COVID-19: the case of a dual labour market," Applied Economic Analysis, Emerald Group Publishing Limited, vol. 30(90), pages 248-262, December.
    4. Samuel Bentolila & Juan Jose Dolado & Juan F. Jimeno, 2019. "Dual Labour Markets Revisited," CESifo Working Paper Series 7479, CESifo.
    5. Pierre Cahuc & Olivier Charlot & Franck Malherbet & Helène Benghalem & Emeline Limon, 2020. "Taxation of Temporary Jobs: Good Intentions with Bad Outcomes?," The Economic Journal, Royal Economic Society, vol. 130(626), pages 422-445.
    6. J. Ignacio García Pérez, 2015. "Should severance pay be consistent for all workers?," IZA World of Labor, Institute of Labor Economics (IZA), pages 174-174, August.
    7. Vicente Núñez-Antón & Juan Manuel Pérez-Salamero González & Marta Regúlez-Castillo & Carlos Vidal-Meliá, 2020. "Improving the Representativeness of a Simple Random Sample: An Optimization Model and Its Application to the Continuous Sample of Working Lives," Mathematics, MDPI, vol. 8(8), pages 1-27, July.
    8. Juan J. Dolado & Etienne Lalé & Nawid Siassi, 2021. "From dual to unified employment protection: Transition and steady state," Quantitative Economics, Econometric Society, vol. 12(2), pages 547-585, May.
    9. Victoria Osuna & J. García-Pérez, 2015. "On the Effectiveness of Short-time Work Schemes in Dual Labor Markets," De Economist, Springer, vol. 163(3), pages 323-351, September.
    10. Marta Silva & Luis Filipe Martins & Helena Lopes, 2015. "Asymmetric labour market reforms and wage growth with fixed-term contracts: does learning about match quality matter?," Working Papers Series 2 15-04, ISCTE-IUL, Business Research Unit (BRU-IUL).
    11. Makoto Masui, 2020. "The determinants of employers’ use of temporary contracts in the frictional labor market," Metroeconomica, Wiley Blackwell, vol. 71(4), pages 803-834, November.
    12. Marco Bertoni & Simone Chinetti & Roberto Nisticò, 2023. "Employment Protection, Job Insecurity, and Job Mobility," CSEF Working Papers 684, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    13. Osune, Victoria, 2014. "Working-week flexibility: Implications for employment and productivity," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-29.
    14. Osuna, Victoria, 2015. "Reducing severance costs or subsidizing permanent job creation: Which policy is more effective to reduce duality?," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 9, pages 1-35.
    15. García-Cintado, Alejandro & Romero-Ávila, Diego & Usabiaga, Carlos, 2015. "Can the hysteresis hypothesis in Spanish regional unemployment be beaten? New evidence from unit root tests with breaks," Economic Modelling, Elsevier, vol. 47(C), pages 244-252.

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    More about this item

    Keywords

    Permanent and temporary contracts; Severance payments; Job seniority; Tenure distribution; Job destruction; Single open-ended labour contract;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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