Workers' transitions from temporary to permanent employment: the Spanish case

This paper studies the duration pattern of fixed-term contracts and the determinants of the transformation of these into permanent ones. To address this issue we estimate a duration model for temporary employment, with competing risks of flowing into permanent employment versus non-employment, and flexible duration dependence. We find that the shape of the baseline hazard is suggestive of two possible uses of temporary contracts by employers. Spikes at durations around one year support the idea that fixed-term contracts are used as a screening device instrument: successful workers obtain a permanent renewal much before the legal limit of their contracts. There is also evidence of a much pronounced spike at three years of duration, coinciding with the maximum duration of fixed-term contracts. This suggests that some employers only opt for permanent hirings when there is no other way to retain the worker. In other words, fixed-term contracts just provide a cheaper option for adjusting their employment level.