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.