Two-Tier Labour Markets in the Great Recession: France Versus Spain

Authors


  • Corresponding author: Juan J. Dolado, Department of Economics, Universidad Carlos III de Madrid, Calle Madrid 126, 28903 Getafe, Spain. Email: dolado@eco.uc3m.es.

  • We are very grateful to Florentino Felgueroso, Gerard Pfann, J. Victor Rios-Rull, Gilles Saint-Paul, Etienne Wasmer and two anonymous referees for their insightful suggestions that have helped us improve the manuscript. Useful comments are also acknowledged from participants at many seminars and conferences. We also thank David Colino for excellent research assistance, and Brindusa Anghel and J. Ignacio García-Pérez for help with data. Bentolila and Dolado gratefully acknowledge financial support from the Comunidad de Madrid (grant ref. S2007/HUM-0444), and Dolado gratefully acknowledges the support of the Banco de España (Programme of Excellence in Education and Research grant) and Ministerio de Educación (grant ref. ECO2010-19357).

Abstract

France and Spain have similar labour market institutions and their unemployment rates were both around 8% just before the Great Recession but subsequently that rate has increased to 10% in France and to 23% in Spain. In this article, we assess the part of this differential that is due to the larger gap between the firing costs of permanent and temporary contracts, and the laxer rules on the use of the latter in Spain. A calibrated search and matching model indicates that Spain could have avoided about 45% of its unemployment surge had it adopted the French employment protection legislation.

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