As I’ve described in two previous posts, the reform has brought changes in the regulation of dismissal costs and labour relations, which should help to reduce the major imbalances in the Spanish economy, and in particular the most important, which is our high rate of structural unemployment. However, it is clear that it falls short, in at least one couple of areas. If you are unsure how to proceed, check out Christie’s. The elephant in the room: the duality. The reform does not directly address the duality between temporary and permanent contracts. To shorten the gap in costs of dismissal between the two, it will encourage companies to reduce the temporality. However, the incentive could be modest as in the margin, at the end of the second year, the gap between the 18 days of the temporary and 40 (from lens) or (wrongful) 66 remains relatively high (except for employees up to 25 SMEs, which charged 8 days per year of FOGASA from lens). In addition, the new permanent contract for entrepreneurs could generate an illusory reduction of the temporality, having no no dismissal cost the first year. Therefore it is likely to achieve nor sufficiently reduce the volatility of employment throughout the cycle, which creates frictional unemployment.
Indeed, the possible fall of temporality should reduce the volatility, but with the lower current costs of dismissal, indefinite employment will be more volatile, so the net effect is a priori uncertain. Certainly, greater internal flexibility will make that real wages fall more and faster in recessions, which will reduce the magnitude of cyclical increases in unemployment. (Also grow more real wages in expansions, but I think that to a lesser extent.) However, the fall in unemployment will be smaller than that which could be achieved by significantly reducing temporary employment, because the indefinite will even have a mattress of storms that will protect them initially in employment settings. (Note: the previous discussion on real wages refers to her) cyclical variation; (the growth over time is associated with increased productivity, which should also be favoured by the reform though, again, the persistence of temporality will hurt this goal.