The interaction of firing costs and on-the-job search: an application of a search theoretic model to the Spanish labour market.

Spain has had a serious structural unemployment problem for the last 20 years. This paper argues that the interaction of /ring costs and job-to-job 0ows added to changes in unemployment bene/ts, could provide an explanation for equilibrium unemployment increasing, since 1984. First, we construct a new series of job-to-job 0ows and show it is signi/cantly trended upwards and positively related to the stock of /xed term contracts. Second, we develop a search theoretic model, with /ring permissions and on-the-job search, and simulate it for Spain. We show that the model can provide an explanation for the evolution of structural unemployment in Spain. Finally, we argue that an increase in the level of equilibrium unemployment can occur at the same time that the economy becomes less dynamically sclerotic.