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Job flows and temporary employment in Spain

21st National Competition for Economic Research Grants (2022)

Economic analysis

Senior Researcher : Felix Wellschmied

Research Centre or Institution : Universidad Carlos III de Madrid.


In Spain, 25% of the employed work in fixed-term contracts. The benefits and costs of allowing firms to offer fixed-term contracts constitute an active policy debate. This project will contribute to this debate both empirically and theoretically.

On the empirical side, the project will study firms' labor demand for fixed-term employment contracts. To this end, it will describe the distribution of fixed and permanent contracts over Spanish firms and link this distribution to firm characteristics such as their size, average pay, and industry. Understanding the cross-sectional distribution of different contracts allows me to answer questions like: Are fixed-term contracts concentrated at some employers or do most employers rely on them? Are there specific firm types relying heavily on fixed-term contracts such as young and fast-growing firms or have some mature firms developed a business strategy that relies permanently on fixed-term contracts? Besides understanding where demand for fixed-term contracts comes from, understanding their concentration also allows me to better understand the substitutability between fixed-term and permanent contracts.

Next, the project will study the dynamics of labor demand for fixed-term contracts by analyzing job flows and linking these to firm characteristics. Doing so will provide me with new insights on the importance of fixed-term contracts for firms’ employment adjustments. Moreover, by studying the dynamics of fixed-term contracts allows me to see whether firms convert those to permanent contracts, i.e., use these as a screening device. Again, the project will put particular emphasis on the heterogeneous use in the dynamics of fixed-term contracts. For example, I will try to understand whether some firms use consecutively fixed-term contracts without ever converting contracts to permanent contracts.

The project will use the insights from this empirical work about firms’ labor demand to build a structural economic model of firms’ dynamic employment decisions. This model will allow me to conduct counterfactual simulations to study the macroeconomic implications of past labor market reforms such as the 2012 reform that has made fixed-term contracts more available to firms. The objective is to understand how such a reform affects the number of fixed-term contracts in the labor market, firms’ costs, aggregate employment outcomes, and the aggregate allocation of workers across heterogeneous firms.

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