Juan José Dolado, Salvador Ortigueira, Rodolfo Stucchi
This paper analyzes howchanges in the firing-costs gap between permanent and temporary workers affect firms’ TFP in a dual labour market. We argue that, under plausible conditions, firms’ temp-to-perm conversion rates go down when this gap increases. Temporary workers respond to lower conversion rates by exerting less effort, while firms react by providing less paid-for training. Both channels lead to a decline in TFP. We test these implications in a large panel of Spanish manufacturing firms from 1991 to 2005, looking at the effects of three labour market reforms which entailed substantial changes in the firing-costs gap. Our empirical findings provide some support for the above-mentioned mechanism.
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