The interaction of firing costs and on-the-job search: an application of a search theoretic model to the Spanish labour market

Spain has had a serious structural unemployment problem for the last 20 years. This paper argues that the interaction of firing costs and job-to-job flows added to changes in unemployment benefits, could provide an explanation for equilibrium unemployment increasing, since 1984. First, we construct a new series of job-to-job flows and show it is significantly trended upwards and positively related to the stock of fixed term contracts. Second, we develop a search theoretic model, with firing permissions and on-the-job search, and simulate it for Spain. We show that the model can provide an explanation for the evolution of structural unemployment in Spain. Finally, we argue that an increase in the level of equilibrium unemployment can occur at the same time that the economy becomes less dynamically sclerotic.