Fixed-term Contracts, Transitions and Wage Growth: Evidence from Spain

Abstract

Employment instability is considered one of the main problems of the Spanish labour market. Thus, the proportion of temporary workers in Spain is around 30 per cent that is the highest rate of the European Union countries. The persistence of this situation could increase the risk of labour market segmentation. This paper presents new evidence of the factors affecting workers' transition from temporary work to permanent one and analyses whether this transition has a positive effect on wage growth. The former objective is obtained by estimating discrete choice models and the latter by estimating a wage growth equation correcting for selectivity bias through the two-step method developed by Trost and Lee (1984). The data are obtained from the second and third waves of the Spanish Household Panel Survey (INE 1996) conducted over the period 1995–1996. The main results are, on the one hand, that personal and job characteristics have a significant influence on the probability of becoming a permanent worker and, on the other hand, that this transition has an important positive effect on wage growth.