New research finds negative impact of temporary work liberalisation on earnings and employment in Spain

The UB School of Economics and Barcelona Institute of Economics (IEB) researcher Dr Judit Vall Castelló has contributed to a new study that has found evidence of a large downward jump in earnings and employment in Spain after the liberalisation of fixed-term contracts in 1984. The reform reduced the number of days worked by 4.9% and earnings by 9.8% in the first 10 years of the workers’ careers. Over 27 years of labour market career, yearly earnings losses amount to a persistent 7.3%. According to the authors, the most likely causes of these negative outcomes are the larger probability of working under non-permanent contracts and wage penalties due to unemployment and temporary work.

The study was conducted by Dr J. Ignacio García-Pérez from the Pablo de Olavide University, Dr Ioana Marinescu from the University of Pennsylvania and Dr Judit Vall Castelló from the University of Barcelona, who explained to the UB School of Economics that “the results of this study show the negative long term effects of a wide use of temporary contracts in the economy and provide evidence of the strong need to implement policy reforms to limit its use”. The findings were published in the scientific journal The Economic Journal under the title “Can Fixed-term Contracts Put Low Skilled Youth on a Better Career Path? Evidence from Spain”.

According to this new research, the liberalisation of fixed-term contracts in 1984 helped low-skilled youth find a first job by reducing the commitment made by employers. However, it negatively affected the worker’s welfare, as these contracts reduced the long-run employment and earnings prospects. “Far from being a stepping stone, fixed-term contracts are a stumbling block for the career of low skilled workers”, concludes the study.

During the first half of the 1980s, the Spanish unemployment rate experienced a rapid growth and it went over 20%. This prompted the Spanish government to introduce the first reform designed to liberalise the use of temporary contracts and to reduce firing costs for this type of contracts. For this study, the authors tracked cohorts of workers who entered the labour market before and after the 1984 reform. Specifically, they focused on males without a high-school diploma because they are most likely to be affected by the liberalisation of temporary contracts.

Employment and earnings trends were positive before the reform, with each cohort doing better than the previous cohort. However, the authors reveal a large downward jump in the trimester of the reform. Furthermore, the employment and wages trends become negative after the reform, with each cohort doing worse than the previous one. Their findings indicate that the short to medium run effects of temporary contracts are as large as half of the effects of a Great Recession that raised the Spanish unemployment rate from 8% before 2008 to 27% in 2013.

Men who entered the labour market under lax fixed-term contracts regulation were more likely to hold non-stable employment contracts even years after their entry into the labour market. In fact, the rate of upgrading of temporary contracts into permanent ones is less than 10% in Spain because firms prefer to hire a new worker on a temporary contract after the temporary contract expires rather than upgrading the worker to a permanent contract, which has higher firing costs. As a result, workers in a temporary job tend to remain in a temporary contract or non-employed.

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