Abstract

This paper explores the role of labor regulation over the cyclical pattern of labor productivity by analyzing the case of Spain, which has gone in a few years from a strongly pro-cyclical pattern to a counter-cyclical one. A description of the mechanism underlying the
counter-cyclical behavior of Spanish labor productivity has thus far not been formulated. In this paper, we offer an explanation based on Oi’s 1962 model that seems to fit with the empirical evidence for Spanish labor productivity. Our results suggest that the high rigidity in wages and the great flexibility in labor, related to temporary workers following the 1984 legislative reform, is the main cause of the countercyclical pattern of Spanish labor productivity. Our findings are in line with previous papers highlighting the crucial influence of labor market institutions over the cyclical pattern. In addition, our analysis shows that the strong increase in labor productivity during contractions lack the appropriate fundamentals for the long term, given that the increase Spanish labor productivity is on average very weak in the long term.