How Binding are Legal Limits? Transitions from Termporary to Permanent Work in Spain

In the mid-1980s,most accessions to permanent employment in several European countries have been through fixed-term contracts. This paper studies the duration pattern of fixed-term contracts and the determinants of their conversion into permanent ones in Spain, where the share of fixed-term employment is the highest in Europe. We estimate a duration model for temporary employment, with competing risks of terminating into permanent employment versus alternative states, and flexible duration dependence. Our estimated conversion rate has a clear, pronounced spike at 3 years of duration, coinciding with the legal maximum duration of these contracts, suggesting that some fixed-term contracts are only converted when there is no other way to retain the worker. Also, there is a spike around 1 year of duration, indirectly suggesting that some fixed-term contracts may be used as screening devices: workers who successfully pass the screening may obtain a conversion much before the legal duration limit.