Wage adjustment in Spain: slow, inefficient and unfair?

Our analysis of microeconomic data between 2008 and 2013 suggests that real aggregate wages in Spain fell by about 4.5% over the period 2008-2013. However, this aggregate figure masks a greater underlying reduction in individual wages, which occurred at the same time as changes in the composition of the employed population: as massive labour shedding was taking place, more tenured, more educated, and more qualified workers tended to be relatively less affected.

Our analysis suggests that temporary workers were both more likely to lose their jobs and more likely to suffer larger wage cuts. The data also indicate that the selection bias was even stronger for temporary workers: the average quality of the temporary labour force appears to have improved more than the average quality of employees with open-ended contracts. This could be partly explained by distortionary effects of the relatively higher degree of employment protection afforded to employees with open-ended contracts under Spanish legislation. Because companies’ decisions about lay-offs are affected by dismissal costs, it is possible that factors unrelated to performance, such as tenure, may have influenced companies’ decisions on which of their employees with open-ended contract they should dismiss.

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