Dynamic interaction between permanent and temporary employment across manufacturing labor markets in the Mexican states: A structural panel VAR approach

Abstract

México’s implementation of several labor market reforms aimed to stimulate the flexibilization of labor relationships have brought long-standing concerns among scholars and governmental authorities about a displacement process of permanent by temporary jobs. In this regard, this manuscript aims to respond whether the dynamic interaction between permanent and temporary employment across Mexican states describe a substitution or complementary relationship. By means of implementing a structural panel vector autoregressive model, our estimation results demonstrate that a combination of both types of interaction, substitutive and complementary ones, prevail across manufacturing labor markets at state level. Moreover, a marked heterogeneity among estimated dynamic responses suggests that incentivizing permanent employment would induce stronger substitution effects on its temporary counterpart than, for example, substitution of permanent job positions arising when incentivizing temporary employment.