The Impact of the 2012 Spanish Labour Market Reform on Unemployment Inflows and Outflows: a Regression Discontinuity Analysis using Duration Models

This paper studies the impact of the 2012 Spanish labour market reform on the probability of exiting and entering unemployment using a regression discontinuity approach based on duration models. The 2012 reform modified important aspects of hiring and dismissal procedures in Spain. By doing so, it affected the probability of exiting both unemployment and employment. Comparing labour market performance before and after February 2012 and using a competing risk duration model for the exit from both unemployment and employment, we find that the reform contributed to employment creation in two ways. First, it increased the likelihood of exiting from unemployment to employment by increas-ing the monthly transition to permanent employment from 1.7% to 2.6%, on average, for the first twelve months of unemployment. Second, it reduced the probability of exiting from employment for workers on a temporary contract, particularly at small firms, most likely because the firms were using newly introduced internal flexibility measures to adjust the workforce instead of using external flexibil-ity measures. The direct transition from temporary to permanent positions was also eased by the re-form. Finally, we do not find any significant effect of the reform on the dismissal patterns for perma-nent workers. These findings point to a positive effect of the reform in dampening the widespread segmentation of the Spanish labour market, although the impact is so far small, which means that more effort will be needed to substantially reduce the strong duality of this labour market.