Promoting Permanent Employment: Lessons from Spain

This paper presents the first joint evaluation of the two major labour market reforms implemented in Spain to foster permanent employment in 1994 and 1997. The 1994 reform restored the principle of causality in the application of temporary contracts and the 1997 reform introduced a new permanent contract with lower payroll taxes and dismissal costs than the ordinary one. To evaluate these non-targeted reforms I present a family of semiparametric estimators that predict the outcome that would have been observed in the absence of a reform by exploiting the time series variation of the outcome in the pre-reform period. Alternative counterfactuals are also explored by means of conventional between-groups estimators. Estimates using the Spanish Labour Force Survey indicate that employers did not change their contract conversion practices in response to either the 1994 or the 1997 reform. The 1997 reform succeed in increasing unemployment to permanent employment transition probabilities for most groups of unemployed workers, including the middle-aged. This result rejects the natural experiment research design in existing papers analyzing the effects of the 1997 reform.