An explanation of the changes in the proportion of temporary workers in Spain

Abstract

In this paper a theoretical model is developed to identify the main determinants of the proportion of temporary workers at firms. The outcomes show that the proportion of temporary workers has a counter-cyclical behaviour: it grows during the slump period up to 1995 and falls during the subsequent recovery. However, given the effect of the general economic cycle, firms that raise their sales or improve their market dynamism index tend to increase their proportion of temporary workers. This proportion also rises when the average labour cost decreases, firm size increases, and the knowledge capital stock diminishes.

Acknowledgements

This paper has been written within the framework of the projects SEJ2004-04065 funded by the Ministerio de Educación and Innovation and Employment in European Firms (IHPSE-CT-2001-00047) funded by the European Commission for the period 2001–2003 and coordinated by Jordi Jaumandreu (Universidad Carlos III-Spain). Variables and data have been constructed by A. García, J. Jaumandreu and C. Rodríguez for another paper entitled ‘Innovation and jobs: evidence from manufacturing firms’. I wish to thank the participants at the V Jornadas de Economía Laboral (Reus, 2003) and the XXVIII Simposio de Análisis Económico (Sevilla, 2003) for their comments.

Notes

¹These data have been taken from the Encuesta de Población Activa and Franco and Jouhette (2001). More information is available in Booth et al. (2002), which shows the proportion of temporary workers for 13 European countries and for several years over the period 1985–1998. In addition to Spain, only in Sweden, Finland and Portugal is this ratio over 15%. The proportions for the UK, Belgium and Austria, on the other hand, are under 8%.

² See Commision of the European Communities (2000).

³ A description of the main features of Spanish labour reforms and their effects on temporary employment can be found in Alba and Alonso (1997), Malo and Toharia (1997), Aguirregabiria and Alonso (1999), Toharia (1999) and Segura (2001).

⁴ Equivalents to 20 or 45 days’ wages per year of seniority, depending whether the dismissal is declared by the Judge as ‘fair’ or ‘unfair’ (procedente or improcedente), with a maximum amount of 42 months’ wages.

⁵ In the case of the very well used Fomento del Empleo (employment promotion) temporary contract, severance payment was equivalent to 12 days’ wages per year of seniority. Contracts were signed for a short period (usually six months) with the contracts renewed during a maximum length of three years. Other contracts developed at this time were the Prácticas (work-experience) and Formación (job training) contracts.

⁶ See Ministerio de Trabajo y Asuntos Sociales (2001).

⁷ In the year 2001, temporary contracts converted in permanent ones represented only 3.7% of total temporary contracts (Ministerio de Trabajo y Asuntos Sociales, 2001).

⁸ All the data were obtained from the Encuesta de Población Activa.

⁹ Besides the economic cycle, having a fixed-term contract is related to workers’ age. Usually, the port of entry to the labour market is a temporary contract and this contract is therefore more frequent among young people. Given the data from the Encuesta de Población Activa, the percentage of temporary workers in the year 2001 was 63.15% for the age group between 20 and 24 years and 82.54% for individuals between 16 and 19 years old. Apart from this, the proportion of temporary workers was higher for women than for men (34.3% as opposed to 30.03%).

¹⁰ Taken from the Encuesta Sobre Estrategias Empresariales for the period 1990–1999.

¹¹ For the British case, temporary hiring seems to be a ‘stepping stone’ towards permanent employment. This mainly affects younger and elderly people, as well as those who have previously been dismissed.

¹² Notice that if the state of the economy is good there are no firings and the firm's adjustment costs are zero.

¹³ Several authors have shown the importance of wage differences between fixed-term and non-fixed-term workers. For instance, Dolado and Bentolila (1992) estimate that a 1% increase in the proportion of temporary workers raises the wage of permanent ones by 0.33%. On the other hand, Jimeno and Toharia (1993) show that having a temporary contract reduces workers’ wages by 11%, holding other worker features constant. Finally, Jaumandreu and Martínez (1995), using information from the Encuesta Sobre Estrategias Empresariales for 1990, observe that, ceteris paribus, hiring a temporary worker implies a 30% reduction in the firm's labour cost compared with the hiring of a permanent one.

¹⁴ For the Spanish case, Sánchez and Toharia (2000) show that firm productivity diminishes as the proportion of temporary workers increases.

¹⁵ It should be noted that collective agreements set the same basic (guaranteed) hourly wages for temporary and permanent workers. The only possible wage differences are set by professional group, job characteristics (risk, etc.), seniority and individual efficiency. In practice, the differences observed between permanent and temporary workers are generated mainly by seniority payments and the professional group.

¹⁶ Notice that

¹⁷ With respect to Expression 9, notice that

as L_{P −1} is known.

¹⁸ Spanish collective agreements set a single growth rate of wages, independently of the type of labour contract.

¹⁹ This survey has been funded by the Ministry of Industry and it was carried out by the Fundación Empresa Pública. For more information about this survey, see García et al. (2002).

²⁰ It should be noted that

and therefore if L_T /(L_P +L_T ) rises, then L_T /L_P also increases.

²¹ W is defined as:

²² Appendix B details the construction of the ‘operative’ knowledge capital stock.

²³ Data processing has been carried out using GAUSS and the application DPD98 for GAUSS was used to estimate the equations (Dynamic Panel Data, Arellano and Bond, 1988).

²⁴ For those variables that are defined in relative terms (such as T_it , T_{it −1} y U_t ) and for D90_94 _t , we take simple differences, while in the case of K_it , W_it and Y_it , we compute logarithmic first differences or growth rates. On the other hand, given the definition of the market dynamism index, D_it , this variable is included in levels, as are the F set of dummy variables.

²⁵ For an application of GMM to panel data, see Arellano and Bond (1991). For the estimation of equations a and b, the instruments used were the lags of the endogenous variables expressed in levels for period t − 2 in the case of T_{it −1}, from t − 2 to t − 5 in the case of W_it , and for t − 3 and t − 4 in the case of K_it . For the remaining equations, we have used all the lags from t − 2 backwards in the case of T_{it −1} and from t − 3 backwards in the cases of W_it and K_it . The set of instruments also includes all the exogeneous variables. The total number of instruments is 64 in Equations a and b, and 117 in the remaining cases.

²⁶ This statistic is distributed as a χ ² with (p − k) degrees of freedom, where p is the number of instruments and k is the number of regressors. The null hypothesis is that the instruments are valid.

²⁷ The m ₂ statistic is distributed as a standardized normal variate, and the null hypothesis is the absence of second-order serial correlation (Arellano and Bond, 1991), which is a necessary condition for the undifferenced errors to be white noise.

²⁸ For example, this proportion was three points lower for the larger firms in 1999.

²⁹ Dolado et al. (2002) consider that the incidence of the legal reforms on the proportion of temporary workers has been relatively unimportant. The estimated effect of these reforms was only a 1% reduction in the proportion of temporary workers. Güell and Petrongolo (2000) also conclude that the 1994 legal reform was ineffective in reducing the number of temporary contracts.

³⁰ With the aim of resolving this problem, in 2001 the Spanish Government set a legal severance payment equivalent to 8 days’ wages per year of seniority for the Obra o Servicio and Eventual contracts in an attempt to reduce temporary hiring (Law 12/2001, 9 July).

³¹ Obra o Servicio and Eventual contracts represented 65.6% of all the contracts signed in 2001 (INEM, 2001). However, before the 1994 reform Fomento del Empleo temporary contract was as frequent as each of the former. For instance, in 1989, 20.5% of all the contracts signed were of Fomento del Empleo, 22.5% Eventuales and 23.8% by Obra o Servicio (Segura et al., 1991, p. 92).

³² This new contract is aimed at very specific labour groups: the unemployed between 16 and 30 years old or older than 45, unemployed women in occupational groups where they are misrepresented, the disabled, and people who have been unemployed for more than six months. It is also used as a way of transforming temporary into permanent contracts. Finally, this contract is characterised by a legal severance payment of 33 days’ wages per year of seniority if the dismissal is declared ‘unfair’, up to a maximum of 24 months’ wages.

³³ See INEM (2001).

³⁴ See Hernanz (2002).

³⁵ This variable was computed by García et al. (2002). See this paper for more details.

³⁶ For a recent application see, for example, Hall and Mairesse (1995).