Labor market rigidities and economic e ffi ciency : Considering labor as a dynamic input ∗

The aim of this paper is to discuss the efficiency consequences of labor market rigidities. First, we estimate a production function that takes into account the duality of the Spanish labor market. We consider two types of labor input depending on the magnitude of the dismissal costs: a dynamic input determined by permanent contract workers and a variable, non dynamic input determined by fixed-term contract workers. Second, we discuss the effects of labor market reforms in the 1990s that removed the flexibility of temporary workers. Toward this end, we estimate the gap between the marginal revenue product of labor and its marginal cost and then examine the changes in this gap during the 1990s. Third, we analyze the relationship between share of temporary contract workers and productivity growth. The data used to conduct this analysis come from a panel of small Spanish manufacturing firms from 1990 to 2001. Our findings suggest that the reforms resulted in a loss of efficiency. Moreover, our results suggest that temporary workers are not significantly less productive than permanent workers. Finally, we do not find a clear negative relationship between temporary contract workers and firm productivity.