Labour Flexibility and Wages: Lessons from Spain

Spanish labour markets Samuel Bentolila and Juan J. Dolado Temporary jobs have been on the rise in Europe, partly in response to firms' desire for higher flexibility in employment, and partly because flexibility is widely believed to help bring down unemployment. However, the flexibility gained through temporary contracts hardly affects the core of permanent employees. Instead, temporary jobs result in the emergence of a dual labour market. Worse, it is conceivable that wage growth actually rises when wage setting is in the hands of permanent insider workers, as happens in many European countries. This possibility receives empirical support in a sample of five EC countries, especially in those where permanent employment is highly costly to adjust. Spain, which has gone furthest in promoting temporary employment, provides an interesting and worrisome picture of what to expect if two-tier labour markets become prevalent in Europe.