We review some lessons from the Spanish experience of using temporary employment contracts for regular jobs since 1984. The focus is on the role of fixed-term contracts with low severance pay, which have substituted for reform of employment protection legislation for permanent contracts. We consider the main findings about this reform on the Spanish labour market in the light of the main theoretical implications derived from models dealing with dual labour markets, and address why the incidence of temporary work has remained highly persistent, around 33% of salaried employment, in the 1990s, despite several reforms aimed at reducing it.If one looks for a country to test for the different effects of temporary work contracts on the labour market, Spain provides a fascinating case study. Up to the early 1980s, permanent work contracts open ended contracts subject to man datory severance payments represented more than 90% of all contracts, with the remaining temporary contracts being mainly of seasonal nature which employers could only use to hire workers performing non regular productive activities, for example, in agriculture or in the tourist industry. In 1984, with the unemploy ment rate at 20.1%, the Spanish government tried to implement a significant change in Employment Protection Legislation (EPL) by liberalising temporary contracts in two main respects: first, their use was extended to hire employees performing regular activities; and, second, they entailed much lower dismissal costs than the regular permanent contracts. As a result, the proportion of tem porary employees in total (salaried) employment surged in the second half of the 1980s, staying above 30% since 1990 (Fig. 1). A clear sign that employers took full advantage of the newly available flexibility device is that a large fraction of tem porary workers have been hired under fixed term contracts while other types of temporary contracts (probationary, seasonal, etc.), which are more representative in other European labour markets, have remained relatively unimportant (Fig. 2).During the 1990s, despite a series of countervailing labour market reforms in 1994, 1997 and, more recently, in 2001, which provided a less stringent EPL for permanent contracts and considerable restrictions for the use of fixed term contracts, the share of temporary employees has only marginally declined from 35.4% in 1995 to 32.0% in 2001. Over this period, more than 90% of new hires have been signed under temporary contracts, and the duration of employment spells has very much decreased. Thus, in just a decade, a fairly regulated labour * We are grateful to Alison Booth, Ignacio Conde, Jeff Frank, Miguel A. Malo, Barbara Petrongolo, Donald Storrie, Luis Toharia, participants in seminars at Amsterdam, Bocconi, Essex, Montreal and Southampton universities, three anonymous referees and an editor, for very helpful comments and suggestions. Special thanks to Virginia Hernánz and Mario Izquierdo for their research assistance, and to Luis Sauto for providing us with the data abou...

Employment protection legislations (EPL) are not enforced uniformly across the board. There are a number of exemptions to the coverage of these provisions:¯rms below a given threshold scale and workers with temporary contracts are not subject to the most restrictive provisions. This within country variation in enforcement allows to make inferences on the impact of EPL which go beyond the usual crosscountry approach. In this paper we develop a simple model which explains why these exemptions are in place to start with. Then we empirically assess the e®ects of EPL on dismissal probabilities, based on a double-di®erence approach. Our results are in line with the predictions of the theoretical model. Workers in¯rms exempted from EPL are more likely to be laid-o®. We do not observe this e®ect in the case of temporary workers.