In this article, we present an analysis of the institutional evolution of firing in Spain. We explain how a certain path-dependence has been created by historical accidents and how this is the mechanism behind the current system of a costly employment at will. The incentives of firms, workers and governments to sustain such a system are also discussed. We show the main inefficiencies of the system: a substantial increase in severance pay, a distorted use of the legal framework, and limitations to give a rapid answer to a big negative shock. Finally, we discuss how the unemployment benefits reform of 2002 can be understood as the culmination of Spain's policy of costly employment at will.
