Temporary Contracts across Generations: the Long-term effects of a labour market reform at the margin

Malo, M.A. and Cueto, B. (2013), “Temporary Contracts across Generations: Long-term effects of a labour market reform at the margin”, Cuadernos de Economía, 36, 84-99.

In this article, we analyse the incidence of temporary employment across generations and the long-term impact of a labour market reform easing the use of temporary contracts by firms. Our data come from Spain where this type of labour market reform was implemented in 1984 and where the temporary employment rate has been among the highest in Europe in the last two decades. We evaluate the impact of this reform at the margin on different generations (defined as birth cohorts). As a reform at the margin only affects to those entering (or re-entering) into the labour market, we focus on the comparison of those entering into the labour market after the implementation of the reform at the margin and those already in the labour market in 1984. Therefore, we are not providing a comparison before-after the reform nor a counterfactual of what would have happened without such reform, but a comparison of workers at the margin and workers only at the margin if they lose their job or have a delayed entry into the labour market.

We use micro-data of the Spanish Labour Force Survey re-arranged as artificial or synthetic birth cohorts from 1987 to 2010. We follow for this period 12 birth cohorts (defined as 5 years groups). There are relevant observed differences by gender, as women usually have a higher Temporary Employment Rate (TER) along their working lives almost irrespective of their birth cohort. Descriptive differences by educational level are also remarkable. For those up to the mandatory educational level, the TER increased relatively rapidly after the implementation of the reform for older cohorts (those already in the labour market in 1984) and for those entering after the reform at the margin the TER was initially relatively high and slowly decreasing as age increases. For those with a university degree, TER remained almost unchanged for older cohorts after the reform, and although for younger cohorts the TER is very high at the beginning of their working life, it decreases at a faster pace as age increases.

Econometric estimations of the effect of the labour market reform at the margin are based on a regression discontinuity design. The discontinuity is the reform because it can be considered as exogenous respect to the behaviour of workers and firms. We define the cut off as the entering age into the labour market by educational level (16 for those up to the mandatory educational level, 18 for those with secondary level, and 23 for those with a university degree).

The estimated impact on the mean TER for cohorts entering into the labour market after the legal change of 1984 is relatively small and it is not supportive of the view that the reform has heavily affected to younger generations creating a long-term relevant increase in TER along their working lives. Especially, this is not true for those with a university degree. Although for those with university level the observed difference between the cohort entering after the reform and the cohort already in the labour market is the largest one (around 10 percentage points), almost the whole difference is related with differences between both cohorts and not with the discontinuity created by the labour market reform at the margin of 1984. For birth cohorts in the vicinities of the cut off of being 23 years old in 1984, the impact on the mean TER strictly related with the reform at the margin is 0.66 percentage points for males and 0.91 for females.

As a whole, our results do not support the view that the labour market reform at the margin implemented in 1984 has created a key difference among generations leaving younger cohorts in a sort of ‘permanent trap’ of precariousness respect to older cohorts. Anyway, these results do not support that this reform was ‘good’ or ‘positive’ for the welfare of individuals. That would be a different question concerning a comparison of the observed results under the reform and a counterfactual scenario without such reform (or with a reform for all and not at the margin). Our results are based on comparisons with data obtained after the implementation of the reform for all cohorts, and basically they say that those entering after the easing of temporary contracts have not had a much more unstable working career than those birth cohorts who entered into the labour market before easing temporary contracts in 1984.

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