Appendix: Definition and Sources of Policy and Institutional Indicators
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The author is grateful to Andrea Bassanini and Romain Duval for providing some of the data and programs andto Marialuz Moreno-Badía for early discussions and help in tracking the history of labor market reform in Spain. The author also acknowledges helpful comments from Céline Allard, Ravi Balakrishnan, Helge Berger, Olivier Blanchard, James Daniel, Angel Estrada, Prakash Kannan, Stefano Scarpetta, and attendants at a conference “High-Level Seminar on Labour Market Experiences: Towards More Efficient Labour Markets” held at the Bank of Spain on May 11, 2010.
The recent surge in the Spanish unemployment rate during the 2008-2009 crisis has been examined in details in IMF (2010) and Bentolila et al. (2010).
The EU15 includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.
Temporary contracts (or workers) refer to both fixed term contracts (workers) and temporary agency work contracts (workers).
This suggests that since then employment growth has been similar in permanent and temporary contracts.
Most temporary workers are involuntarily on temporary contracts. In addition to the cost of being in precarious contracts, temporary workers are also usually entitled to less unemployment benefits due to shorter and interrupted work history (see Bank of Spain, 2009).
For a more comprehensive theoretical and empirical survey of the impact of policies and institutions on employment, see Bassanini and Duval (2006).
For instance, Berger and Danninger (2007) find sizeable positive effects on employment growth of joint deregulation of product and labor markets, including through interaction effects.
There are two indicators of the structure of collective bargaining. The first one refers to the degree of centralization in negotiations and captures the level at which negotiations are conducted; the second one is the degree of coordination among unions on the one hand and among employers on the other hand. It is accepted that the more relevant indicator is the degree of coordination, as a very decentralized system with high coordination could mimick the outcome of a fully centralized system (see Flanagan, 1999). Spain has both an intermediate degree of centralization and coordination. While many EU15 countries have an intermediate degree of centralization, they also have a high degree of coordination. In the remainder of the paper, the focus is on the degree of coordination of collective bargaining.
The latest wage agreement negotiated for 2010-2012, which postpones indexation until the end of the agreement, represents a small improvement.
The difference is even greater if one compares with the conditions for fair dismissals in EU15, since many unfair dismissals in Spain would actually be considered fair in other countries.
The reform has little impact on the overall EPL for permanent workers (interim wages are typically only two months of salary). Yet, the way it was incorporated into the sub-indicators of EPL for permanent workers is a bit odd: the sub-indicator for difficulty of dismissals (which refers mostly to conditions for unfair dismissals) falls substantially to a level below the EU15 average – despite any significant change in severance payments for unfair dismissals or in the definition of fair dismissal – while the sub-indicator for fair dismissals rises – despite any change to severance payments or notice periods for fair dismissals. To test the robustness of our results, we calculate an alternative (“corrected”) measure of the sub-indicators for Spain, which basically keeps the value constant at the 2002 level (given the absence of later reform).
From January 1, 2012, this subsidy will be replaced by the creation of an individual capitalization fund for each new permanent employee, with contributions to the fund amounting to a number of days’ pay (to be determined) per year of service. The employees will be able to draw upon this fund in cases of dismissal, geographic mobility, training, or retirement. The new fund must not entail a net increase in employer social security contributions.
Specifically, with respect to temporary contracts, the reform tightens limits on successive renewals and the maximum length of such contracts and gradually (from 2012) raises severance payments from 8 to 12 days for all temporary contracts.
Spending on active labor market policies is not introduced in the regression due to strong endogeneity issues.
Following Bassanini and Duval (2006), observations for Finland, Germany and Sweden in 1990 and 1991 are removed from the sample, and different country fixed effects are used for each of the three countries over the two sub-periods 1982-1989 and 1992-2007. This is because highly country-specific factors (the collapse of the Soviet Union, the unification and the banking crises) were behind the increase in unemployment over these two years, and including these six observations would risk biasing the estimates. Excluding these observations did not change conclusions from their analysis. Their study also suggests that the estimated coefficients of institutional and policy variables are not affected by whether they simply control for the output gap – as in our paper – or instead use more sophisticated measures of macroeconomic shocks.
An alternative model used in the literature introduces as additional variables the interaction of time dummies with (sample averages of) the institutions and policies to capture the fact that institutions and policies may affect the response to shocks (Blanchard and Wolfers, 2000). However, as it does not add much in terms of improving the fit of the regression, this paper uses the simpler model.
As a result, when earlier observations are dropped from the sample, the magnitude of the coefficients on the coordination variables changes a lot (as in the Arellano-Bond estimation) and in some cases only one of the two coordination variables (the level and its square) can be estimated (e.g. when using the subcomponents of EPL for which data start later).
Tax wedges for single people without children in Ireland are much higher, though still well below the EU15 average.
We are only aware of one other macroeconomic study that examines empirically the determinants of temporary employment using a panel data set, Nunziata and Staffolani (2007).
This is due to the lack of change in the variable over a smaller sample than the one used in the unemployment rate regression combined with the presence of country fixed effects.
See also Nunziata and Staffolani (2007) for a similar result using a panel of European countries over the period 1983-1999.
The significance of unemployment benefits and product market regulation is somewhat reduced when clustered standard errors are used, while the significance of the tax wedge is reduced in the bilateral regression with the share of temporary workers. Excluding country fixed effects does change coefficients drastically. However, they are precisely included to reduce biases in coefficient estimates due to the potential omission of other determinants of the unemployment rate. Hence, we do not see this sensitivity test as calling into question the main results of our study
See Blanchard and Landier (2002) and Cahuc and Postel-Vinay (2002). They argue that the effect of a partial reform of employment protection, which allows firms to hire workers on fixed-term contracts while maintaining strong employment protection on regular contracts, may be perverse, increasing unemployment as well as decreasing welfare. A policy that permits the opening of more temporary jobs fosters both job creation and destruction, but the latter effect is strengthened when high firing costs discourage the conversion of temporary jobs into permanent ones.
We are grateful to Olivier Blanchard for pointing this out.