Temporary contracts and labour productivity in Spain: a sectoral analysis Bienvenido Ortega • Andre ´s J. Marchante Published online: 7 July 2010 Ó Springer Science+Business Media, LLC 2010 Abstract This paper analyses the impact on sectoral labour productivity growth caused by the increase in the use of temporary employment contracts in Spain over the period 1987–2000. With this aim, we estimate a production function model in which effective labour is represented by the shares of permanent, temporary and self-employed workers. Results suggest that productivity growth has been slowed down by the use of temporary contracts for regular jobs and that this has not been affected by compositional changes in activity over the period. However, this effect has only been detected in the manufacturing and energy sector, in contrast to low-technology low-human capital sectors like construction and hospitality. Keywords Labour productivity  Labour market segmentation  Aggregate production function  Sectoral analysis  Temporary contracts JEL Classifications J24  O47 1 Introduction Since 1984 there has been increased labour market seg- mentation in Spain due to the surge in temporary contracts. After the 1984 reform in Employment Protection Legisla- tion and the introduction of new fixed-term contracts 1 — motivated by the persistence of unemployment generated from the mid-1970s onwards—the quotient between tem- porary employment and total salaried employment in Spain reached 34.6% in 2004 (this even reached 47.2% in Andalusia and over 50% in the case of the construction sector) whereas this was *13% in the OECD as a whole. 2 Despite the 1994, 1997 and 2001 reforms—aimed at both reducing the cost of firing for permanent employees and restricting the use of fixed-term contracts—, severance pay seems to continue to have a deterrent effect on the creation of permanent contracts, 3 given that the share of temporary employees has only marginally declined in some sectors since 1995, as shown in Fig. 1. On the one hand, the emergence of such temporary contracts would have positive effects on the economy, especially in the case of Spain, where permanent workers have high levels of employment protection. In line with Booth et al. (2002a), temporary contracts can provide a mechanism that enhances labour market flexibility, since firms can adjust their workforces by varying the number of temporary workers. For example, these contracts may serve as a buffer stock that allows firms to adjust the workforce to fluctuations in product or service demand. Temporary work can also provide the firm with workers under a given probation period, in order to test whether the new staff are suitable for a permanent job. This type of employment can B. Ortega (&)  A. J. Marchante Universidad de Ma ´laga, Malaga, Spain e-mail: ortega@uma.es 1 The new temporary contracts allow hiring employees to perform regular activities (whereas previous temporary contracts were mainly seasonal) and entail much lower dismissal costs than permanent contracts (see Dolado et al. 2002). 2 Although the share of temporary contracts in total employment has been increasing in other European countries, these differences are striking in the context of EU-15 (see Booth et al. 2002a and OECD 2008, p. 53). 3 The 2001 labour market reform contains restrictions on the successive use of temporary contracts, increases in fiscal support for the creation of jobs with new permanent contracts and transitory incentives to convert temporary contracts into permanent ones (OECD 2007, p. 52). 123 J Prod Anal (2010) 34:199–212 DOI 10.1007/s11123-010-0185-z