Does dual employment protection affect TFP? Evidence from Spanish manufacturing firms

Abstract

This paper analyzes how changes in the firing-costs gap between permanent and temporary workers affect firms' TFP in a dual labour market. We argue that, under plausible conditions, firms' temp-to-perm conversion rates go down when this gap increases. Temporary workers respond to lower conversion rates by exerting less effort, while firms react by providing less paid-for training. Both channels lead to a decline in TFP. We test these implications in a large panel of Spanish manufacturing firms from 1991 to 2005, looking at the effects of three labour market reforms which entailed substantial changes in the firing-costs gap. Our empirical findings provide some support for the above-mentioned mechanism.

Dual employment protection and (lack of) on-the-job training: PIAAC evidence for Spain and other European countries

“…By the same token, given their large turnover, temporary workers may lack the right incentives to improve on their job performance by acquiring better pro-ductive capabilities. Hence, since these skills and OJT are important components of multifactor productivity, this mechanism may have played a relevant role in explaining the unsatisfactory development of TFP growth in Spain and other EU countries with highly segmented labor markets (see Bassanini et al 2009;Dolado et al 2016).…”

“…This result is also in line with the findings by Arulampalam et al (2004) that Spain is one of the European countries where being on a fixed-term contract leads to lower training. In line with this approach, Dolado et al (2016) present a model where the decisions of employers and workers interact in a dual labor market akin to the Spanish one. Their main result is that, when the EPL gap is large, not only employers find it unprofitable to invest in training temporary workers but also that these workers would respond to the lower and more uncertain promotion prospects by exerting lower effort.…”

“…12 Furthermore, there is a probability α that a temporary contract may be transformed into a permanent one in the same job. 13 Following Dolado et al (2016), it is assumed that this conversion rate is decreasing in F, namely, α´(F) < 0.…”

The Spanish Productivity Puzzle in the Great Recession

“…That is, …rms having a relatively larger size within the total population of …rms 1 6 Indeed, the di¤erences between the LP coe¢ cients associated with permanent and temporary labor are all statistically signi…cant at 1% level. 1 7 Coe¢ cients associated with permanent labor seem slightly higher in the agriculture industry for Dolado et al (2011), but this may be explained by the fact that their classi…cation of agriculture includes also industrial machinery. 1 8 Aggregated …gures are obtained by aggregating …rms using employment weights.…”

Is labor flexibility a substitute to offshoring? Evidence from Italian manufacturing

“…8 Temporary contracts might also serve a screening purpose -see for instance Portugal and Varejão (2009). We do not consider here the differences in productivity between temporary and open-ended contracts (Dolado et al, 2012;Lotti and Viviano, 2012), which might compensate differences in labor costs. Note however that the same issue arises for workers in third countries where production is offshored.…”