The Transitory Effects of Payroll Tax Reduction on Employment Stability: Evidence from Spain.

The aim of this study is to analyze the effects of payroll tax reductions that promote permanent contracts as opposed to fixed-term to increase job stability. Traditionally, the effects are studied from the point of view of worker characteristics. However our perspective is that the characteristics of firms may have an influence on the effects of payroll tax reduction on job stability. The data used come from the 2005 Continuous Work History Sample (CWHS). The database includes administrative records from the Social Security system with the entire labor history of 1.2 million people (around 4% of all affiliated workers) and some information about the firms such as economic sector, size, legal status, tenure, region, public or private ownership or national or international capital. We find out a positive effect of payroll tax reduced contracts on the probability to remain employed during the year after the contract have been signed, that turns negative in the following years. Consequently, the effects of payroll tax reduction are positive in the short term but negative in a longer term.