The Influence of Labour Reforms on Inflation. Evidence from Spain

Changes in labor legislation may have a major impact on inflation. They transform the structure of labor costs, the most important cost for firms. This channel of influence has barely been explored. This paper presents empirical evidence of its effect on inflation. Using the Phillips curve approach, we analyze alterations in Spanish labor legislation and their influence on inflation. The labor reforms (in 1984, 1994, 1997 and 2012) that sought to make labor relations more flexible, allowing firms to adapt, have a significant and negative influence on inflation; they help firms to reduce costs by using labor more efficiently with new types of contracts and/or temporary hiring. The reforms of 1992, 2001, 2006 and 2010, with more ambivalent or milder objectives, have no influence. The significant reforms require adequate time as firms need to adapt to the new rules and translate them into prices, supporting the idea of sticky prices.