This article provides a longitudinal perspective on changes in Spanish male earnings inequality for the period 1993-2000 by decomposing the earnings covariance structure into its permanent and transitory parts. Cross-sectional earnings inequality of male full-time employees falls over the second half of the 1990s. Such decline was determined by a decrease in earnings instability and an increase of the permanent earnings component. Given the marked decline in temporary employment over the sample period, we also examine the effect of the type of contract on earnings variance components and find that workers on a fixed-term contract face, on average, more instability than workers on a permanent contract. This evidence suggests that the decline in temporary employment is responsible for the decreasing earnings instability. © Blackwell Publishing Ltd/London School of Economics 2011.