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 and, by doing that, 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 has helped employment creation in two ways. First, it has increased the likelihood of exiting from unemployment to employment by making the monthly transition to permanent employment to increase from 1.7% to 2.6%, on average, for the first six months in unemployment. Secondly, it has reduced the probability of dismissal for workers on a temporary contract around 11%, probably because firms used newly introduced internal flexibility measures in order to adjust the workforce, instead of using dismissals. The direct transition from temporary to permanent positions is also eased by the reform. Finally, we do not find any significant effect of the reform on the dismissal patterns for permanent 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 in order to substantially reduce the strong duality of this labour market.