Labour market liberalisation and sectoral productivity: a reappraisal of the Spanish experience

This article aims to investigate the impact of Spain’s 1997 labour market reform on sectoral productivity, with a particular focus on the post-reform period from 1997 to 2007. Using the reform as a natural macroeconomic experiment and drawing on data spanning 1989 to 2007, the study evaluates both pre- and post-reform dynamics to understand the long-term effects. To account for potential temporal heterogeneity and endogeneity biases, we employ the interactive fixed effects counterfactual (IFEct) estimator and the matrix completion (MC) estimator. Our results reveal a significant 11% decline in aggregate labour productivity, which doubled within a decade post-reform. Notably, decomposition analysis suggests that the tradable sector accounts for two-thirds of this productivity loss, highlighting heterogeneous responses of labour productivity across sectors. Our findings remain robust to alternative industry classifications and other sensitivity analyses. This paper contributes to the limited empirical evidence on the productivity effects of labour market liberalisation reforms by providing a sectorally disaggregated analysis of Spain’s 1997 reform. By leveraging novel counterfactual methods, the study offers robust quantitative evidence that such reforms can have substantial and persistent negative effects on labour productivity, particularly in tradable sectors. These findings are critical for policymakers, as they highlight the potential trade-offs between labour market flexibility and productivity performance, and underscore the critical importance of designing reforms that balance employment objectives with long-term economic efficiency.