The ins and outs of unemployment in a two-tier labor market

This paper aims to shed some light on the dynamics of the Spanish labor market, using data from the Spanish Labor Force Survey for the period 1987 to 2010. We examine transition rates in a three-state model and compare our results with those reported for the UK and the US. Explicitly, introducing the employment duality present in the Spanish labor market, we study labor market dynamics in a four-state model set-up and we compute the contribution of the different transitions rates to unemployment fluctuations. Our main findings are as follows: i) around 85% the employment-unemployment gross flows involve temporary contracts; ii) the transition rates involving temporary employment account for around 60% of the fluctuations in the unemployment rate; iii) almost 80% of the unemployment rate volatility - explained by movements between unemployment and employment - involves the transition rates to/from temporary jobs. Our overall conclusion points out that the employment duality is the key to understanding the unemployment volatility and the functioning of the Spanish labor market.