Book Description

This Country Focus discusses the effects of the reform of the severance payment regime on job-to-job mobility in Spain. Job-to-job mobility is important in the process of allocation of resources towards more productive sectors and companies. Prior to the reform in 2012, Spanish employees hired under open-ended contracts enjoyed a particularly generous severance payment regime by international standards. This is likely to have contributed to the observed comparatively low job-to-job mobility. The 2012 labour market reform, amongst other things, introduced a cap on the severance payment of employees hired with open-ended contracts, mainly with the aim of encouraging new hires. A possible positive side effect of the reform may be to decrease employees' disincentives to job mobility. In the current macroeconomic context, job-to-job transitions are far too infrequent events to estimate directly the impact of the reform on job mobility. Instead, we analyse the impact of the reform on the search rate of employees hired on open-ended contracts - the so called "on-the-job search rate". The hypothesis of an increase in search behaviour after the reform is tested empirically. The results support the hypothesis of a significant increase in job search behaviour post-reform, which may translate into higher levels of job mobility once employment creation moves more sustainably into positive territory and more vacancies materialise.