The Bentolila et al (2010) paper investigates the different unemployment responses in France and Spain after the Great Recession (2007-2009). While both countries had a pre-crisis unemployment rate of around 8%, by the end of 2009 Spain had reached 19% unemployment but France just 10% (see Figure 1). The paper argues that Spain’s higher reliance on temporary work contracts was the main driver of the difference. Spain’s larger employment protection legislation gap led to their dissimilar labour market structures.
Figure 1: Unemployment increased much more in Spain than in France by the end of 2009
Data: OECD, Bonsai Economics.
The contentious impact of temporary employment contracts
Temporary working contracts have a mixed effect on employment as they lead to both job creation and destruction. They increase employer flexibility allowing for more hires, but they also lead to the substitution of permanent positions with temporary ones, and they create easily terminated jobs. In fact, during the Great Recession temporary workers experienced the most redundancies. Furthermore, according to OECD data, in Q4 2007 in France, 14% of workers were on flexible contracts which is little compared to the 31% share in Spain. The lower degree of protection in Spain made employment more sensitive to the economic shock, which led to the jump in unemployment in 2009. It comes to show that even though Spain and France had the same level of employment in 2007, the quality of the jobs was not the same in terms of worker protection.
Why are temporary employment contracts much more prevalent in Spain?
A key factor that shapes the share of temporary vis-à-vis permanent employment contracts is the size of the employment protection legislation (EPL) gap. The EPL gap is the difference between the protection of permanent and temporary employment: the larger the gap, the higher the company incentive to substitute permanent positions for flexible ones.
Bentolila et al. (2010) estimate the EPL gap of Spain to be considerably larger than in France, which partially explains the higher prevalence of flexible work in Spain. Interestingly, the paper estimated the EPL gap according to policy implementation and not legislation alone. This distinction is key as according to the OECD (2004) EPL estimates, which focus on legislation alone, the EPL gap is the same in both countries. It is in the implementation stage that the gap is formed. For example, red tape- costs for redundancies are 50% higher in Spain, which makes it more expensive to fire permanent workers. Moreover, while both countries have similar legislation surrounding when temporary contracts are permitted, the lack of monitoring in Spain has allowed them to be used much more broadly. Once policy implementation is accounted for, the higher permanent position firing costs and the greater ease of using temporary contracts lead to a higher EPL gap in Spain.
Conclusion
Bentolila et al (2010) make the interesting point of a high EPL gap leading to more temporary contracts and more subsequent job destruction during an economic crisis. In fact, it is this ease in firing that explains the big jump in unemployment in the U.S. during the Covid-19 crisis. At the same time, it is important to remember that the pre-crisis Spanish economic boom relied on the construction sector. The construction sector was one of the main beneficiaries of temporary employment and it is unclear to what extent it would have grown had it experienced more restrictions.
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