The Effect of Product Market Competition on Job Instability

Abstract

This paper assesses the impact of product market competition on job instability as proxied by the use of fixed-term labor contracts. Using both worker data from the Spanish Labor Force Survey and firm data from the Spanish Business Strategies Survey, I show that job instability rises with competition. In particular, a one standard deviation increase in competition in an economic sector decreases the probability that a fixed-term worker gets an open-ended contract within that sector in a given year by more than 30%. The effect is identified by means of exogenous shifts in competition brought about by changes in legislation.