## _wp1111

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---

### I. Introduction and research questions
- For most of the last thirty years, the Spanish unemployment rate has been very high and cyclical.
- Spain entered the European Monetary Union in 1994 with the highest unemployment rate at 24 percent.
- Unemployment declined to 8 percent in 2007 and rose back to 20 percent after the 2008 crisis.
- About thirty percent of workers are in temporary (fixed-term) contracts.
- Research questions:
  - (i) What Spanish labor market institutions and policies are most different from those of the EU15?
  - (ii) Do these explain the high underlying unemployment rate and share of temporary workers?
  - (iii) What reforms could cut both the unemployment rate and the share of temporary workers and what lessons can be drawn from other EU15 reformers?

### Major findings
- Collective bargaining at the intermediate level and very high severance payments for permanent workers are key distinguishing features that constrain wage flexibility and accentuate insider-outsider problems.
- Decentralizing collective bargaining could substantially reduce the unemployment rate by reducing excessive wage demands and increasing wage flexibility.
- Reducing unemployment benefits and lowering the tax wedge would lower labor costs and reduce unemployment.
- Product market deregulation reduces unemployment by boosting activity and labor demand but tends to increase the share of temporary workers.
- Reducing the share of temporary workers:
  - Lowering employment protection for permanent workers is central.
  - Restricting regulation of temporary contracts plays a lesser role.
  - Lowering unemployment benefits and the tax wedge would also reduce duality.
- No clear trade-off between reducing unemployment and curbing temporary work; most reforms move both in the same direction except PMR which can increase temporary work.
- Higher share of part-time workers is positively associated with lower unemployment; expanding part-time from its low level in Spain could yield benefits.

### Policy implications and reform priorities
- Decentralize collective bargaining to increase wage flexibility and reduce excessive wage demands.
- Reduce unemployment benefits to lower labor costs and improve incentives.
- Lower the tax wedge to reduce the cost of labor.
- Reduce employment protection for permanent workers to decrease labor market duality and the share of temporary contracts.
- Combine product market deregulation with offsetting measures to contain rises in temporary work.
- Encourage an increased share of part-time employment as a potential route to lower unemployment.

### Key problems of the Spanish labor market (Section II)
- High unemployment:
  - Average since 1980: 16.2 percent.
  - Crisis level: 20 percent, double the EU15 average and highest in the EU15.
  - Incidence especially high for youth.
- High cyclicality:
  - Larger unemployment oscillations than other countries.
  - Output elasticities of employment larger than for other EU15 countries (see Table 1).
  - Wage rigidity leads firms to adjust via dismissals rather than wages or working time.
- High share of temporary contracts and few part-time contracts:
  - About 30 percent temporary contracts; highest in EU15 and about double the EU15 average.
  - Temporary share rose strongly in the mid-1980s and remained roughly constant thereafter; declined somewhat in the recent crisis.
  - Share of part-time contracts very low.
- Wage rigidity and macro/social costs:
  - Wages and labor costs grew faster than in most other EU15 countries during most of the 2000s.
  - Real wages have not adjusted to labor market conditions and sometimes behaved counter-cyclically.
  - High unemployment causes fiscal costs, lower tax collection, pressure on financial sector, potential hysteresis, depressed human capital investment, and reduced productivity.

### How Spain’s institutions and policies differ from EU15
- Collective bargaining:
  - Intermediate coordination primarily at province and industry level.
  - Four worsening features:
    - National guidelines act as minima compounded by industry/province/company increases (wage drift).
    - Automatic extension of agreements to entire provinces/industries accentuates insider-outsider problems.
    - "Opt-out" clauses are very restrictive.
    - High degree of wage indexation; wages indexed on inflation and corrected asymmetrically.
  - Result: reduced wage and firm flexibility; ill-suited for a currency union.
- Employment protection legislation (EPL):
  - Overall EPL indicator average, but:
    - Among highest severance payments and very restrictive interpretation of fair dismissals.
    - About 90 percent of lay-offs of permanent workers are treated as unfair.
    - In 70 percent of cases firms prefer to pay higher severance payments upfront rather than go through a trial.
    - Severance payments: 20 days per year of service for fair dismissals; 33 to 45 days per year of service for unfair dismissals (maximums of 24 and 42 months respectively).
    - EU15 average severance payments: about 7 days per year for fair dismissals and 21 days for unfair dismissals.
    - Severance for temporary workers: 8 days per year of service (12 days for temporary work agency workers).
    - Trial period for no-severance dismissals much shorter than in other countries.
  - Temporary work is strictly regulated relative to other countries; the share of temporary workers correlates more with protection of permanent workers than with regulation of temporary contracts.
- Other policies:
  - Unemployment benefit net replacement rates:
    - Average net replacement rates over first five years: 50 percent.
    - Initial net replacement rates: 77 percent.
    - By fifth year: 41 percent (including social assistance).
    - Profile: high initial support with a sharp expected decline.
  - Tax wedge: around 32 percent with higher employers’ social security contributions and lower employees’ social security contributions and personal income tax.
  - ALMP spending per unemployed (scaled by GDP per capita) well below EU15 average; large fraction spent on employment subsidies rather than training and public employment services.
  - Product market regulation: somewhat below EU15 average; PMR reduced especially since mid-1990s.

### Recent reforms and their features
- Pre-2010 reforms:
  - 1997: new permanent contract with lower severance pay for unfair dismissal (33 instead of 45 days per year) for most newly employed; low take-up and de facto 45 days in many cases.
  - 2003: eliminated obligation to pay interim wages to dismissed workers awaiting trial if employers recognize unfair dismissal.
- June 2010 reform main measures:
  - (1) Generalize use of the contract with 33 days severance pay per year of tenure.
  - (2) Ensure 33 days is the upper limit.
  - (3) Finance 8 days of severance payments via a fund paid for by firms.
  - (4) Ease criteria for “fair” dismissal (20 days severance).
  - (5) Broaden and simplify opt-out from collective bargaining.
  - Other measures: reduce notice period for objective dismissals; stricter conditions and higher costs for terminating temporary contracts; allow private for-profit agencies in labor intermediation; expand training contracts for unemployed and uneducated youth; streamline employment subsidies.
  - From January 1, 2012: subsidy financing 8 days replaced by individual capitalization fund for each new permanent employee; employees can draw for dismissal, mobility, training, retirement; fund must not entail a net increase in employer social security contributions.
  - From 2012: severance payments for temporary contracts gradually raised from 8 to 12 days.
- Assessment:
  - Reform may be significant depending on use and implementation, but does not radically overhaul the labor market: EPL remains above EU average and the reform does not institute widespread decentralization of wage setting.

### Determinants of the unemployment rate: model, results, and simulations
- Model specification:
  - Regress unemployment on degree of coordination of wage bargaining (and its square), union density, EPL indicator, average gross replacement rate of unemployment benefits, tax wedge, degree of product market regulation.
  - Controls: lagged unemployment rate, output gap, country fixed effects, time fixed effects.
  - Sample: 20 OECD countries, 1982-2007.
  - Estimation: ordinary least squares; robustness checks include Arellano-Bond, clustered standard errors, excluding outliers, dropping variables, bilateral regressions.
- Benchmark regression results (Table 5):
  - Unemployment Benefit Replacement Rate coefficient: 0.025 [3.21]***.
  - Tax Wedge coefficient: 0.028 [2.13]**.
  - Union Density: 0.01 [0.94].
  - Employment Protection Legislation (EPL): 0.077 [0.42].
  - Product Market Regulation: 0.097 [1.17].
  - Coordination of Wage Bargaining: 6.355 [1.68]*.
  - Square of Coordination of Wage Bargaining: -1.659 [1.78]*.
  - Output Gap: -0.279 [12.74]***.
  - Lagged Dependent Variable: 0.801 [31.17]***.
  - Number of observations: 511; Adjusted R-squared: 0.99.
- Main estimation findings:
  - Unemployment increases with intermediate bargaining, high unemployment benefits, and high tax wedge.
  - EPL overall has little effect in the baseline multivariate regression.
  - PMR and union density effects are imprecise in full specification but PMR becomes significant when insignificant variables are dropped.
  - Caveat: coordination estimates rely on few observations.
- Simulations and equilibrium unemployment:
  - Model-implied equilibrium unemployment rate around 14 percent.
  - Structural reform magnitudes from model estimates:
    - Moving from intermediate to fully coordinated bargaining: improve equilibrium unemployment by 10 percentage points (Table 7).
    - Moving from intermediate to completely decentralized bargaining: reduce equilibrium unemployment by 7 percentage points.
    - Bringing average gross replacement rate from current 36 percent to minimum observed 12 percent (UK): reduce long-run unemployment by 3 percentage points.
    - Bringing tax wedge from current 32 percent to minimum observed 2 percent (Ireland): reduce long-run unemployment by 4 percentage points.
    - A 10 percentage point reduction in either replacement rate or tax wedge: improvement of the order of 1.5 percentage points.
  - Cautions: large magnitudes for bargaining changes should be treated cautiously due to limited observations; fiscal implications differ across policies; combinations of moderate changes can achieve larger effects while minimizing budgetary impact.

### Policy lessons from other EU15 cases
- Four EU15 countries reduced unemployment substantially pre-crisis: Ireland, United Kingdom, Netherlands, Denmark.
- Ireland: sharp reductions in tax wedge and union density and a transformation of collective bargaining from decentralization to complete coordination.
- Other successful mixes combined decreases in unemployment benefits, lowering tax wedges (UK and Denmark), decreases in union density, and product market deregulation.

### Active labor market policies (ALMP)
- Evidence suggests ALMPs gain efficiency when refocused on training.
- Employment subsidies, widely used in Spain, are generally shown to be ineffective.

### Determinants of the share of temporary workers — model, results, and simulations
- Model specification:
  - Regress share of temporary workers on institutional and policy variables, lag of temporary share, country and time fixed effects.
  - Key measures: EPR (EPL for permanent workers), EPT (strictness for fixed-term contracts and temporary agency work).
  - Sample: 20 OECD countries, 1985-2007 (maximum years available).
- Benchmark regression results (Table 9):
  - Unemployment Benefit Replacement Rate: 0.046 [2.52]**.
  - Tax Wedge: 0.05 [2.00]**.
  - Union Density: -0.019 [0.74].
  - Product Market Regulation: -0.295 [1.92]*.
  - Output Gap: -0.094 [1.76]*.
  - Lagged Dependent Variable: 0.777 [17.55]***.
  - Number of observations: 335; Adjusted R-squared: 1.
- Determinants and mechanisms:
  - Factors boosting temporary share: higher unemployment benefits, higher tax wedge, lower product market regulation.
  - PMR increases temporary work through competition, sectoral shifts toward services, and lower rents prompting temporary hiring.
  - Collective bargaining effects on temporary share not robustly identified.
  - Employment protection of permanent workers increases temporary share; the most robust effect stems from difficulty of dismissal (unfair dismissals, compensation, reinstatement, trial length).
  - Strictness of regulation of temporary work tends to reduce temporary share but coefficients often insignificant.
- Simulations and historical patterns:
  - Equilibrium share of temporary workers declined by about 4 percentage points since 1988 (declined 9 percentage points until 2003 then rebounded slightly).
  - Decline mainly due to lowering EPL on permanent contracts and strengthening regulation on fixed-term contracts, largely offset by product market deregulation.
  - Policy simulation magnitudes:
    - Bringing three components of EPL for permanent workers to EU15 minimum would reduce temporary share by 1, 3.5, and 9 percentage points respectively, totaling 13.5 percentage points.
    - Reducing tax wedge and replacement rate would also lower temporary share.
  - Cross-country patterns:
    - France, Italy, Germany: increasing or flat temporary shares driven by PMR and liberalization.
    - Ireland: decline in temporary share (recently reversed) mainly due to large tax wedge decrease.

### Complementarities and trade-offs among reforms
- Unemployment rate and share of temporary workers are positively correlated: countries with higher temporary shares also have higher unemployment rates.
- Reform interactions:
  - Most reforms move unemployment and temporary shares in same direction (e.g., tax wedge, replacement rate).
  - Product market reform reduces unemployment but increases temporary share → requires offsetting measures.
  - Decentralization of collective bargaining and reduction of protection for permanent workers likely need joint implementation to be effective; decentralization alone may not yield wage flexibility if EPL remains high.

### Part-time contracts versus temporary contracts
- Higher share of part-time contracts associated with lower unemployment, in contrast to temporary contracts which are positively correlated with unemployment.
- Most part-time contracts are voluntary and encourage participation by women with children, youth, and older workers.
- Spain’s very low share of part-time contracts suggests scope to expand part-time work as policy.

### Selected quantitative results, diagnostics, and tables
- Employment elasticities to output (Table 1): Spain Total Hours Worked 1.67; Employment 1.41; Germany 0.75 and 0.78; France 1.25 and 0.70; Italy 0.82 and 0.86; Sweden 1.01 and 1.01; UK 1.46 and 1.06; US 0.96 and 0.71.
- Regression diagnostics:
  - T-statistics reported in brackets; significance denoted by * (10%), ** (5%), *** (1%).
  - Robustness checks include dropping insignificant variables, clustered standard errors, excluding outliers, Arellano-Bond estimations.
- Policy simulation highlights (Table 7 and Table 8):
  - Coordination of Wage Bargaining long-run effect: -6.5 (Average EU15) to -9.8 (Policy Change) on unemployment in long-run simulation.
  - Tax Wedge long-run Minimum EU15 effect: -4.4 on unemployment.
  - Unemployment Benefit Replacement Rate long-run Minimum EU15 effect: -3.0 on unemployment.
  - Country policy mixes (Table 8): Ireland Tax Wedge -23.7; Spain Unemployment Benefit Replacement Rate 8.0; Spain Product Market Regulation -3.4.

### Conclusions
- Reforming labor market institutions and policies can materially affect the unemployment rate and the share of temporary workers.
- Multiple policy mixes can achieve similar outcomes; key recommendations for Spain emphasize:
  - Fundamental reform of collective bargaining away from intermediate coordination toward full decentralization (decentralization appears preferable for Spain given its economic structure).
  - Reductions in unemployment benefits and tax wedges and further product market deregulation to complement bargaining reform.
  - Reduction of employment protection for permanent workers to lower temporary shares.
  - Policy coordination is essential: some reforms (replacement rates, tax wedge) improve both unemployment and duality; PMR needs offsetting measures; decentralization should be paired with EPL reductions.

*Source: _wp1111 — IMF Working Paper content provided from the source PDF.*

### References .............................................................................................................

### _wp1111 - References

### I. Introduction and research questions
- For most of the last thirty years, the Spanish unemployment rate has been very high and cyclical.
- Spain entered the European Monetary Union in 1994 with the highest unemployment rate at 24 percent.
- In the strong growth period that followed, the unemployment rate declined to 8 percent in 2007.
- As the domestic economic cycle turned and the global financial crisis struck starting in 2008, unemployment soared back to 20 percent.
- A related and problematic feature of the Spanish labor market is its high duality, with about thirty percent of workers in temporary (fixed-term) contracts.
- The paper reexamines, in a cross-country and long-run perspective, what makes the Spanish labor market different and dysfunctional by asking three questions:
  - (i) What Spanish labor market institutions and policies are most different from those of the EU15?
  - (ii) Do these explain the high underlying unemployment rate and share of temporary workers?
  - (iii) What reforms could cut both the unemployment rate and the share of temporary workers and what lessons can we draw from other reformers in the EU15?

### Major findings
- Spain stands out by the structure of its collective bargaining, which takes place at the intermediate level and greatly constrains wage flexibility, and by the very high severance payments for permanent workers, which accentuate the insider-outsider problem.
- The unemployment rate could be substantially reduced by effectively decentralizing collective bargaining, thereby reducing excessive wage demands and allowing more wage flexibility.
- Reducing unemployment benefits and lowering the tax wedge would also help reduce unemployment by lowering the cost of labor.
- Deregulating product markets reduces unemployment including by boosting activity and labor demand.
- Reducing the share of temporary workers could be achieved by lowering the very high employment protection of permanent workers and to a lesser extent by restricting the regulation of temporary contracts.
- Lowering unemployment benefits and the tax wedge would help reduce the duality of the labor market.
- Product market deregulation tends to increase the share of temporary workers (including by increasing competition and the need for firms to be able to adjust quickly) and should be combined with offsetting measures.
- There does not appear to be a trade-off between reducing the unemployment rate and curbing the share of temporary workers.
- The decentralization of collective bargaining and the reduction of the protection of permanent workers probably need to be enacted jointly to effectively reduce the unemployment rate.
- A higher share of part-time workers is positively associated with lower unemployment, suggesting that raising the share of part-time workers from its currently low level could be associated with substantial benefits in terms of lower unemployment.

### Policy implications and reform priorities
- Decentralize collective bargaining to increase wage flexibility and reduce excessive wage demands.
- Reduce unemployment benefits to lower labor costs and improve incentives.
- Lower the tax wedge to reduce the cost of labor.
- Reduce employment protection for permanent workers to decrease labor market duality and the share of temporary contracts.
- Combine product market deregulation with measures to offset the tendency for temporary work to rise.
- Encourage an increased share of part-time employment as a potential route to lower unemployment.

*Source: _wp1111 - References*

### Section II discusses the problems of the Spanish labor market, comparing its performance

### _wp1111 - Section II discusses the problems of the Spanish labor market, comparing its performance

### Key problems of the Spanish labor market
- High unemployment
  - Spain’s unemployment rate has averaged 16.2 percent since 1980.
  - During the boom years the unemployment rate remained above 8 percent.
  - With the crisis the unemployment rate is back at 20 percent, double the EU15 average and the highest in the EU15.
  - Incidence of unemployment is especially high for youth.
  - Labor force participation is in line with euro-area average but employment rates are relatively low, reflecting the high unemployment rate.
- High cyclicality of employment and unemployment
  - The unemployment rate shows much larger oscillations than in other countries.
  - Output elasticities of employment are larger than for other EU15 countries (Table 1 referenced).
  - High degree of wage rigidity leads firms to adjust to negative demand shocks by dismissing workers or exiting rather than cutting wages or working time.
- High share of temporary contracts, few part-time contracts
  - About 30 percent of the labor force is in temporary contracts; this is the highest level in the EU15 and about double the EU15 average.
  - Incidence of temporary contracts is highest for youth and women.
  - The share of temporary workers rose strongly in the mid-1980s (when fixed term contracts were liberalized) and has been roughly constant since then; it declined somewhat in the recent crisis as employment destruction fell disproportionately on temporary workers.
  - Share of part-time contracts has remained very low in Spain.
- High degree of wage rigidity
  - Wages and labor costs grew faster than in most other EU15 countries and much faster than labor productivity growth during most of the 2000s, widening unit labor cost differentials (reversed during the recent crisis due to strong productivity growth as labor was shed).
  - Real wages have not responded much to labor market conditions and have even behaved counter-cyclically, amplifying employment oscillations.
- Macro and social costs
  - High unemployment causes fiscal costs (unemployment benefits and employment subsidies), lower tax collection, pressure on the financial sector via personal defaults and corporate bankruptcies, potential hysteresis (skill loss, lower labor force, reduced productive capacity), depressed investment in human capital, reduced productivity and potential output.

### How Spain’s institutions and policies differ from EU15
- Collective bargaining
  - Spain has an intermediate level of coordination of wage bargaining, primarily at the province and industry level.
  - Four features worsen the system:
    - National guidelines act as minima that are typically compounded by industry/province (and sometimes company) increases, leading to high wage drift.
    - Wage agreements are automatically extended to entire provinces or industries, including non-participating firms and employees; combined with low union density this accentuates insider-outsider problems.
    - "Opt-out" clauses are very restrictive and not easily used.
    - High degree of wage indexation (more widespread than in other countries); wages typically indexed on inflation and corrected when inflation turns out higher than expected (but not vice versa), causing high wage drift and reducing sensitivity of real wages to labor market conditions.
  - This wage bargaining system reduces wage and firm flexibility and is ill-suited to membership of a currency union.
- Employment protection legislation (EPL)
  - Overall EPL indicator for permanent workers shows an average score, but:
    - Spain has among the highest severance payments and a very restrictive interpretation of fair dismissals.
    - About 90 percent of lay-offs of permanent workers are treated as unfair.
    - In 70 percent of cases firms prefer to pay higher severance payments upfront rather than go through a trial.
    - Severance payments: 20 days per year of service in case of fair dismissals; 33 to 45 days per year of service for unfair dismissals (with a maximum of 24 and 42 months respectively).
    - EU15 average severance payments: about 7 days per year of service for fair dismissals and 21 days for unfair dismissals.
    - Severance payments for temporary workers are 8 days per year of service (and 12 days for temporary work agency workers).
    - Trial period (initial employment period during which employer can dismiss without severance) is much shorter than in other countries.
  - Temporary work is strictly regulated relative to other countries, especially for temporary agency work and fixed term contracts.
  - The steep rise in temporary workers followed the 1984 broadening of authorized uses of fixed term contracts; the share of temporary workers appears more closely correlated with employment protection for permanent workers than with protection for temporary contracts.
- Other policies
  - Unemployment benefit net replacement rates
    - Average net replacement rates over the first five years of unemployment are at an internationally high level of 50 percent.
    - Initial net replacement rates are 77 percent (among the highest in the EU15).
    - By the fifth year of unemployment they are 41 percent (including social assistance).
    - The profile is steeper than average: high initial support combined with a sharp expected decline.
  - Tax wedge
    - The tax wedge is around 32 percent; composition differs with higher employers’ social security contributions and lower employees’ social security contributions and personal income tax (and cash benefits).
  - Spending on active labor market policies
    - Spending per unemployed (scaled by GDP per capita) remains well below the EU15 average despite increases.
    - Spain devotes a large fraction to employment subsidies; EU15 countries devote more to training and public employment services.
  - Product market regulation
    - Product market regulation is somewhat below the EU15 average; Spain has reduced PMR especially since the mid-1990s.

### Recent reforms and their features
- Reforms prior to 2010
  - 1997: new permanent contract with lower severance pay for unfair dismissal (33 instead of 45 days per year of service) for most newly employed (with some exceptions); low take-up and de facto 45 days in many cases.
  - 2003: eliminated obligation to pay interim wages to dismissed workers awaiting trial for unfair dismissal if employers recognize unfair character of the dismissal from the start.
- June 2010 labor market reform main measures
  - (1) Generalizing use of the contract with 33 days severance pay per year of tenure so most of the active population will now be eligible.
  - (2) Ensuring the 33 days is indeed the upper limit.
  - (3) Financing 8 days of severance payments via a fund paid for by firms.
  - (4) Easing the criteria for “fair” dismissal (which entails 20 days severance payment).
  - (5) Significantly broadening and simplifying conditions under which firms can opt-out of collective bargaining agreements.
  - Other measures: reduces notice period for objective dismissals; imposes stricter conditions and higher costs of termination for temporary contracts; allows private for profit agencies to operate in labor intermediation; expands training contracts for unemployed and uneducated youth; streamlines employment subsidies to a certain extent.
  - From January 1, 2012: the subsidy financing 8 days will be replaced by creation of an individual capitalization fund for each new permanent employee (contributions to the fund amounting to a number of days’ pay per year of service to be determined); employees can draw upon the fund in cases of dismissal, geographic mobility, training, or retirement; the new fund must not entail a net increase in employer social security contributions.
  - From 2012: severance payments for temporary contracts gradually raised from 8 to 12 days for all temporary contracts.
- Assessment of reform
  - The reform may be significant depending on use and implementation (including courts), but does not radically overhaul the labor market: employment protection remains above EU average and the reform does not institute widespread decentralization of wage setting.

### Determinants of the unemployment rate: model, results, and simulations
- Model and data
  - The paper relates unemployment to: degree of coordination of wage bargaining (and its square), union density, EPL indicator, average gross replacement rate of unemployment benefits, tax wedge, degree of product market regulation.
  - Model controls for lagged unemployment rate, output gap, country fixed effects and time fixed effects.
  - Sample: 20 OECD countries during the period 1982-2007.
  - The model is estimated by ordinary least squares; alternative estimators and robustness checks (Arellano-Bond, clustered standard errors, excluding outliers, dropping variables, bilateral regressions) were performed.
- Main estimation findings
  - Unemployment increases with:
    - Intermediate bargaining (degree of coordination of wage bargaining and its non-linearity).
    - High unemployment benefits.
    - High tax wedge.
  - Unemployment is little affected by the overall employment protection legislation indicator in the baseline multivariate regression.
  - Effects of product market regulation and union density are not precisely estimated in the full specification, though PMR effect is quite large and becomes significant when the most insignificant variables are dropped.
  - Sub-dividing EPL into subcomponents did not yield consistent and robust results.
  - Robustness: dropping union density and EPL leaves results unchanged and makes product market regulation more significant; excluding outliers affects union density estimates (very low union density in Spain may understate union influence due to automatic extension of agreements).
  - Caveat: estimated relationship between coordination of bargaining and unemployment relies on a small number of observations (few countries moving to intermediate coordination in sample).
- Simulations and equilibrium unemployment
  - Using the estimated model to compute an implied “equilibrium” unemployment path yields an equilibrium unemployment rate around 14 percent.
  - The equilibrium unemployment rate has only slightly declined over the last 25 years (model-implied path discussed in the text).

*Italic: Source — _wp1111 - Section II discusses the problems of the Spanish labor market, comparing its performance*

### 1.5 percentage point since 1982 (see Figure 11). Over this period, there was little change in

### _wp1111 - 1.5 percentage point since 1982 (see Figure 11). Over this period, there was little change in

### Unemployment rate: levels, drivers, and magnitudes
- Spanish equilibrium unemployment rate is about double the level of the EU15, which is at 7 percent.
- Over the period discussed, there was little change in the system of wage bargaining and the tax wedge; product market deregulation boosted employment creation but was largely offset by a sharp increase in unemployment benefits.
- Structural reform magnitudes from model estimates:
  - Moving from an intermediate level of bargaining to a fully coordinated bargaining system would improve the equilibrium unemployment rate by 10 percentage points (Table 7).
  - Switching from an intermediate level of bargaining to a completely decentralized bargaining structure would reduce the equilibrium unemployment rate by 7 percentage points.
  - Bringing the average gross replacement rate from the current 36 percent to the minimum observed in the sample (12 percent, UK) would reduce the long-run unemployment rate by 3 percentage points.
  - Bringing the tax wedge from its current level of 32 percent to the minimum observed in the sample (2 percent, Ireland) would reduce the long-run unemployment rate by 4 percentage points.
  - A 10 percentage point reduction in either the replacement rate or the tax wedge would generate improvements in the unemployment rate of the order of 1.5 percentage points.
- Cautions:
  - Large estimated magnitudes for bargaining structure changes should be taken with caution due to the small number of observations (Sweden in the early 1980s) available to estimate such impacts.
  - Fiscal implications differ markedly across policies; combinations of moderate changes could achieve larger effects while minimizing budgetary impact.

### Policy lessons from other EU15 cases
- Four EU15 countries reduced unemployment substantially pre-crisis: Ireland, the United Kingdom, the Netherlands, and Denmark.
- Ireland’s measures included sharp reductions in the tax wedge and union density and a transformation of collective bargaining from decentralization to complete coordination.
- Other successful approaches combined decreases in unemployment benefits, lowering tax wedges (UK and Denmark), decreases in union density, and product market deregulation.

### Active labor market policies
- Evidence suggests active labor market policies gain efficiency when refocused on training.
- Employment subsidies, widely used in Spain, are generally shown to be ineffective (see Bassanini and Duval, 2006).

### Determinants of the share of temporary workers — estimation setup
- Model: share of temporary workers regressed on institutional and policy variables, lag of temporary share, country and time fixed effects (Table 9).
- Key measures included:
  - EPR: employment protection legislation for permanent workers.
  - EPT: strictness of regulation of fixed-term contracts and temporary agency work.
- Sample: 20 OECD countries during the period 1985-2007 (or maximum years available).
- The model explains the share of temporary workers over time in Spain reasonably well (Figure 14).

### Determinants and effects on temporary employment
- Factors that boost the share of temporary workers:
  - Higher unemployment benefits.
  - Higher tax wedge.
  - Lower product market regulation.
- Mechanisms for product market deregulation increasing temporary work:
  - Increased competition and need for firms to adjust quickly.
  - Expansion of services sectors, where temporary work is more frequent.
  - Lower rents prompting firms to reduce labor costs by hiring temporary workers (lower wages and dismissal costs).
- Collective bargaining effect on temporary share is either non significant or non identifiable.
- Employment protection:
  - High employment protection of permanent workers increases the share of temporary workers.
  - The most robust effect stems from the difficulty of dismissal (unfair dismissals, compensation, reinstatement, trial period length).
  - Strictness of regulation of temporary work tends to reduce the share of temporary workers, but coefficients are often insignificant and not robust.

### Robustness checks
- Main results (difficulty of dismissals, unemployment benefits, tax wedge, product market regulation) are broadly robust to:
  - Alternative (“corrected”) EPL measure for permanent contracts.
  - Dropping insignificant variables.
  - Using clustered standard errors.
  - Excluding outliers.
  - Dropping time dummies.
  - Dropping one country at a time.
  - Arellano-Bond estimator for dynamic panel models.
  - Bilateral regressions between unemployment rate and each policy/institutional variable.
- Plots of partial correlations confirm robust impacts of unemployment benefits, tax wedge, difficulty of dismissal, and product market regulation (Figure 15).
- Sensitivities noted:
  - Significance of unemployment benefits and product market regulation reduced with clustered standard errors.
  - Significance of the tax wedge reduced in the bilateral regression with the share of temporary workers.
  - Excluding country fixed effects changes coefficients drastically, but fixed effects are included to reduce bias.

### Simulations and historical patterns
- Equilibrium share of temporary workers declined by about 4 percentage points since 1988 (declined by 9 percentage points until 2003 and then rebounded slightly).
- Decline mainly reflected:
  - Lowering of employment protection on permanent contracts.
  - Strengthening of regulation on fixed-term contracts (to a lesser extent).
  - Largely offset by product market deregulation.
- Policy simulation magnitudes:
  - Bringing the three components of employment protection of permanent workers to the minimum level observed in the EU15 would reduce the share of temporary workers by respectively 1, 3.5, and 9 percentage points, or a total of 13.5 percentage points.
  - Reducing the tax wedge and the replacement rate of unemployment benefits would also help lower the share of temporary workers.
- Cross-country patterns:
  - France, Italy, and Germany experienced increasing or flat shares of temporary workers, driven largely by product market deregulation (and liberalization of temporary contracts in Italy and Germany).
  - Ireland experienced a decline in the share of temporary workers (recently reversed), mainly due to a very large decrease in the tax wedge.

### Complementarity and trade-offs among reforms
- Unemployment rate and share of temporary workers are positively correlated (Figure 17): countries with higher temporary shares also have higher unemployment rates.
- Possible reasons for positive association:
  - Adverse labor demand leading to both high unemployment and high temporary shares.
  - Countries with high unemployment attempting to reduce it via new contract types.
  - Higher rotation for temporary contracts increasing frictional unemployment.
- Reform effects:
  - Most policy reforms either move unemployment and temporary shares in the same direction (e.g., tax wedge, unemployment benefit replacement rate) or affect one without the other (e.g., EPL, degree of coordination of collective bargaining).
  - Main exception: product market reform reduces unemployment but increases the share of temporary workers, implying need for offsetting measures.
- Complementarities:
  - Decentralization of collective bargaining and reduction of employment protection on permanent workers likely need to be implemented together to be effective; decentralization alone may not yield expected wage flexibility or unemployment reductions if EPL remains high.

### Part-time contracts versus temporary contracts
- Higher share of part-time contracts is associated with a lower unemployment rate, in contrast to temporary contracts which are positively correlated with unemployment.
- Most part-time contracts are voluntary and encourage participation and employment of groups otherwise less likely to work (women with children, youth, older workers).
- Spain has a very low share of part-time contracts, suggesting potential scope to expand part-time work as a policy avenue.

### Conclusions and policy implications
- Reforming labor market institutions and policies can have substantial effects on both the unemployment rate and the share of temporary workers.
- Multiple policy mixes can achieve similar outcomes.
- Key reforms to reduce unemployment:
  - Fundamental reform of collective bargaining away from an intermediate level toward either full centralization or full decentralization; for Spain, full decentralization appears preferable given economic structure and need for sectoral reallocation.
  - Combination of reduced unemployment benefits, lower tax wedges, and further product market deregulation could also contribute.
- Key reforms to reduce share of temporary workers:
  - Reduction of employment protection on permanent workers is central.
  - Reductions in unemployment benefits and the tax wedge also help.
- Policy coordination is essential:
  - Some reforms (unemployment benefits, tax wedges) improve both outcomes simultaneously.
  - Product market deregulation requires offsetting measures due to its tendency to increase temporary employment.
  - Decentralization of collective bargaining should be paired with reductions in employment protection on permanent workers to realize intended flexibility gains.

### Appendix: definitions (selected)
- Coordination of wage bargaining:
  - Indicator takes value 1 for uncoordinated systems, 2 for intermediate coordination, 3 for highly coordinated systems. Latest observed value is 2003; later years assumed constant at 2003 level.
  - Source: Bassanini and Duval (2006).
- Union density:
  - Trade union density rate, i.e. share of workers affiliated to a trade union, in percent. Missing years obtained by linear interpolation.
  - Source: Online OECD Employment Database.
- Employment protection legislation (EPL):
  - OECD summary indicator of stringency of EPL.
  - Disaggregations used: EPL for permanent workers; EPL for fixed-term contracts; EPL for temporary agency work; EPL for collective dismissals.
  - Further disaggregation of EPL for permanent workers into procedural inconvenience, notice periods and severance pay for fair dismissals, and difficulty of dismissals (length of trial period, definition of justified/unfair dismissals, compensation for unfair dismissals).
  - Alternative (“corrected”) EPL measure for Spain keeps values constant at 2002 level to account for limited practical impact of the 2003 reform on difficulty of dismissals.
  - Sources: Online OECD Employment Database; Online OECD Indicators of Employment Protection; Venn (2009); data prior to 1985 from Bassanini and Duval (2006).

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1111.pdf*

### 1.      The average net replacement rate over first five years is the average of net

### The average net replacement rate over first five years is the average of net

### Definitions of replacement-rate measures
- Average net replacement rate over first five years:
  - The average of net unemployment benefit replacement rates over 60 months of unemployment.
  - Calculated across two income situations: 100% and 67% of average production worker earnings.
  - Calculated across two family situations: single and with dependent spouse.
  - It includes social assistance.
- Initial net replacement rate:
  - The average net unemployment benefit replacement rate during the first year of unemployment.
  - Calculated across two income situations: 100% and 67% of average production worker earnings.
  - Calculated across three family situations: single, with dependent spouse, and with spouse in work.
  - No social assistance "top-ups" are assumed to be available in either the in-work or out-of-work situation.
- Long-term net replacement rate:
  - The average net unemployment benefit replacement rate in the 60th month of benefit receipt.
  - Calculated across two income situations: 100% and 67% of average production worker earnings.
  - Calculated across three family situations: single, with dependent spouse, and with spouse in work.
  - It includes unemployment benefits, social assistance, and family and housing benefits.
- Average gross replacement rate:
  - The average unemployment benefit replacement rate across two income situations: 100% and 67% of average production worker earnings.
  - Calculated across three family situations: single, with dependent spouse, with spouse in work.
  - Calculated across three different unemployment durations: 1st year, 2nd and 3rd years, and 4th and 5th years of unemployment.
  - Identified as the measure used in the regressions because it is the only one available since the early 1980s.
- Source for replacement-rate measures: OECD, Benefits and Wages Database.

### Tax wedge
- Definition:
  - Tax wedge between the labor cost to the employer and the corresponding net take-home pay of the employee for a single-earner couple with two children earning 100% of the average production worker earnings.
  - The tax wedge expresses the sum of personal income tax, all social security contributions, and (minus) cash benefits as a percentage of total labor costs.
- Data note:
  - Due to a change of methodology starting in the year 2000, data prior to 2000 are projected backward by applying the change in their level to the 2000 data.
- Source for tax-wedge data: OECD, Taxing Wages.

### Public expenditures on active labor market policies (ALMP)
- Definition options provided:
  - Public expenditures on active labor market programmes per unemployed worker as a share of GDP per capita.
  - Or public expenditures on active labor market programmes as a share of GDP, in percent.
- Source: Online OECD Employment Database.

### Product market regulation
- Definition:
  - OECD summary indicator of regulatory impediments to product market competition in seven non-manufacturing industries, including gas, electricity, post, telecoms, passenger air transport, railways, and road freight.
- Source: Online OECD Homepage for Indicators of Product Market Regulation.
- Further reference noted: See Conway and Nicoletti (2006) for more information.

*Source: IMF PDF chapter content provided.*

### REFERENCES

### REFERENCES

### Key empirical findings on unemployment
- Regression results (Table 5, benchmark model):
  - Unemployment Benefit Replacement Rate coefficient: 0.025 [3.21]***
  - Tax Wedge coefficient: 0.028 [2.13]**
  - Union Density: 0.01 [0.94]
  - Employment Protection Legislation (EPL): 0.077 [0.42]
  - Product Market Regulation: 0.097 [1.17]
  - Coordination of Wage Bargaining: 6.355 [1.68]*
  - Square of Coordination of Wage Bargaining: -1.659 [1.78]*
  - Output Gap: -0.279 [12.74]***
  - Lagged Dependent Variable: 0.801 [31.17]***
  - Number of observations: 511; Adjusted R-squared: 0.99
- Robustness and alternative specifications (selected columns):
  - Coefficients remain positive for Unemployment Benefit Replacement Rate (0.024, 0.025, 0.03, 0.02, 0.003, 0.013, 0.018 across columns) with varying significance.
  - Coordination of Wage Bargaining shows non-linear effect (positive linear term and negative squared term) with joint significance p-values of 0*** to 0.06* across specifications.
  - Arrellano-Bond estimations and exclusions of outliers change magnitudes but preserve key significance of Output Gap and persistence (lagged dependent variables).

### Policy simulations: impacts on unemployment (Table 7 and Table 8)
- Simulated short-run and long-run changes in the unemployment rate for policy moves toward Average EU15, Minimum EU15, and specified policy changes (Table 7 summary):
  - Unemployment Benefit Replacement Rate: Short-Run 0.0, Minimum EU15 -0.6, Policy Change -0.3; Long-Run 0.0, Minimum EU15 -3.0, Policy Change -1.3
  - Tax Wedge: Short-Run 0.0, Minimum EU15 -0.9, Policy Change -0.3; Long-Run 0.0, Minimum EU15 -4.4, Policy Change -1.4
  - Union Density: Short-Run 0.2, Minimum EU15 -0.1, Policy Change -0.1; Long-Run 1.1, Minimum EU15 -0.3, Policy Change -0.5
  - Employment Protection Legislation: Short-Run -0.1, Minimum EU15 -0.2, Policy Change -0.1; Long-Run -0.3, Minimum EU15 -0.9, Policy Change -0.4
  - Product Market Regulation: Short-Run 0.0, Minimum EU15 -0.1, Policy Change -0.1; Long-Run 0.1, Minimum EU15 -0.3, Policy Change -0.5
  - Coordination of Wage Bargaining: Short-Run -1.3 (Average EU15), Minimum EU15 -1.4, Policy Change -1.9; Long-Run -6.5, Minimum EU15 -6.9, Policy Change -9.8
- Country-level policy mix changes (Table 8 highlights):
  - Ireland: Unemployment Benefit Replacement Rate change 7.0; Tax Wedge -23.7; Union Density -30.7; Product Market Regulation -2.9
  - Netherlands: Unemployment Benefit Replacement Rate -13.7; Tax Wedge 1.7; Union Density -12.4; Product Market Regulation -3.8
  - United Kingdom: Unemployment Benefit Replacement Rate -10.9; Tax Wedge -8.2; Union Density -20.7; Product Market Regulation -3.5
  - Denmark: Unemployment Benefit Replacement Rate -7.5; Tax Wedge -4.9; Union Density -11.2; Product Market Regulation -4.4
  - Spain: Unemployment Benefit Replacement Rate 8.0; Tax Wedge 0.0; Union Density 4.5; Product Market Regulation -3.4
- Interpretation from simulations:
  - Reductions in Unemployment Benefit Replacement Rate, Tax Wedge, and Coordination of Wage Bargaining produce notable long-run declines in equilibrium unemployment rates (e.g., Coordination centralization scenario yields large negative long-run effects).

### Key empirical findings on share of temporary workers
- Regression results (Table 9, benchmark model):
  - Unemployment Benefit Replacement Rate: 0.046 [2.52]**
  - Tax Wedge: 0.05 [2.00]**
  - Union Density: -0.019 [0.74]
  - Product Market Regulation: -0.295 [1.92]*
  - Coordination of Wage Bargaining (and square): nonlinear effects; square term -0.056 [1.04]
  - Output Gap: -0.094 [1.76]*
  - Lagged Dependent Variable: 0.777 [17.55]***
  - Number of observations: 335; Adjusted R-squared: 1
- Robustness (Table 10 and 11):
  - Coefficients for Unemployment Benefit Replacement Rate and Tax Wedge remain positive and significant across many specifications (e.g., Unemployment Benefit Replacement Rate 0.046, 0.042, 0.046, 0.029, 0.04; Tax Wedge 0.05, 0.049, 0.05, 0.049, 0.059).
  - Disaggregated EPL subcomponents matter: Difficulty of Dismissal shows sizable positive coefficients (e.g., 0.992 [3.20]***), and Fixed Term Contracts show negative coefficients in some specifications (e.g., -0.141, -0.146).

### Policy simulations: impacts on share of temporary workers (Table 12 and Table 13)
- Spain: simulated changes in the share of temporary workers for policy moves:
  - Unemployment Benefit Replacement Rate: France 4.63, Italy 1.3, Germany -3.4, Ireland 9.0, Spain 2.1
  - Tax Wedge: France 5.0, Italy -11.3, Germany -2.9, Ireland -27.8, Spain -0.3
  - Union Density: France -5.8, Italy -9.2, Germany -10.5, Ireland -28.5, Spain 3.3
  - Product Market Regulation: France -3.8, Italy -3.8, Germany -2.9, Ireland -2.9, Spain -3.3
  - EPL subcomponents (selected Spain effects): Fixed Term Contracts 1.0; Temporary Work Agency Employment -1.5

### Labor market indicators and descriptive statistics (figures and tables)
- Figures summarize cross-country and time-series patterns:
  - Figure 1: Unemployment rate, employment growth, labor force participation for Spain vs EU-15 (data sources: OECD; Eurostat Labor Force Survey).
  - Figure 2: Index (2005q1=100) of Hours worked, Wages, Employment, Real output for Spain, Euro area, France, Germany (Source: Statistical Office of the European Communities).
  - Figure 3: Incidence of Temporary and Part-Time Work (sources: OECD; Eurostat; European Commission; Instituto Nacional de Estadistica; WEO).
  - Figure 4–11: Wage dynamics, wage bargaining coordination, employment protection legislation, unemployment benefit replacement rates, tax wedge, ALMP spending, product market regulation (sources as annotated in figures).
- Selected exact numbers and comparisons:
  - Table 1: Employment elasticities to output for Total Hours Worked and Employment: Spain 1.67 and 1.41 respectively; Germany 0.75 and 0.78; France 1.25 and 0.70; Italy 0.82 and 0.86; Sweden 1.01 and 1.01; UK 1.46 and 1.06; US 0.96 and 0.71 (Source: Bank of Spain).
  - Table 2: Extent of Wage Indexation (EU15 average): listed as 0.3, 0.9, 4.7, 14.1 (percent of affected workers) across indexation types.
  - Table 3: Severance Payments for Fair and Unfair Dismissals (months of salary) — country-level values as tabulated (note: Spain entries include Unfair Dismissals: 0.5, 2.7, 1222 and Fair Dismissals entries in table).
  - Figure and table captions cite original data sources (OECD; Eurostat; IMF staff calculations; Bank of Spain; Instituto Nacional de Estadistica).

### Spain: Legal and policy reforms chronology (Table 4 highlights)
- Key legal measures affecting permanent and temporary contracts (selected entries, exact text preserved in original):
  - Law 32/1984 Employment Promotion Contract (EPC): Minimum length 6 months; maximum length 3 years; Severance pay: 12 days’ wages per year of service.
  - Law 11/1994: EPC abolished. Temporary contracts only allowed for fixed-term duration jobs. Legalization of temporary work agencies.
  - Law 63/1997 Permanent Employment Promotion Contract (PEPC): Severance pay for unfair dismissals for objective reasons lowered to 33 days’ wages per year of service (maximum 24 months’ wages), only for targeted groups.
  - Law 12/2001: Extension of coverage of PEPC. Severance pay of 8 days’ wages per year of service in some temporary contracts.
  - Decree 5/2006: Extension of coverage of PEPC. New tax deductions for hiring permanent employees.
  - Law 35/2010: Generalization of coverage of PEPC, ensuring that the 33 days severance pay per year of tenure is indeed the upper limit. Easing the criteria for “fair” dismissal. Broadening and simplification of the conditions under which firms can opt-out of collective bargaining agreements. Reduction of notice periods. Authorization of private for profit placement agencies to operate.

### Regression diagnostics and statistical notes
- Estimation details (as noted in tables):
  - Most regressions include country fixed effects and time dummies and are estimated by ordinary least squares with robust standard errors.
  - T-statistics are reported in brackets; significance denoted by * (10%), ** (5%), *** (1%).
  - Alternative estimations include dropping insignificant variables, clustered standard errors, excluding outliers, no time dummies, no fixed effects, Arrellano-Bond estimations with one or two lags.
  - Joint significance tests reported for coordination variables and subcomponents of EPL with p-values ranging from 0*** to 0.14 depending on specification.

*Source: _wp1111 - REFERENCES (figures, tables, and regression results reproduced from the source PDF).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1111.pdf_