Matching Inefficiencies, Labor Market Flexibility and Local Democracy in Spain

Abstract

By applying a stochastic production frontier approach to the matching process of unemployed and vacancies, this paper provides novel detailed insights into the process of job creation in Spain over the 2006-2012 period. The methodology produces estimates of the relative importance of demand and supply factors for the creation of new jobs, and of regional inefficiencies of job creation. This paper represents a first attempt to test whether a more flexible labour market as designed by the 2010 reform affects the matching efficiencies. We also investigate the possible link existing between local democracy (as factor influencing labour market governance) and inefficiency, handling endogeneity. Results suggest that the matching process was inefficient before the 2008 crisis. Efficiency increased during recession/rebound probably as consequence of policies aims to strengthen the economic system. In particular, the 2010 reform appears to have improved on average the matching efficiencies. Local democracy positively influences efficiency (and the effect is substantially higher when endogeneity in the inefficiency is handled). Despite these considerations, regional disparities in matching efficiencies persisted over time. Therefore, these results support the recommendation of further reducing matching inefficiencies before implementing policies aimed to increase the stock of vacancies at least in regions characterized by persistent inefficiencies.