The Impact of Extending Employment Protection to Agency Workers on Firms

We study the impact of a reform that extended employment protection to temporary agency workers. Using a difference-in-difference research design, we show that plants more exposed to the regulation experienced a decrease in revenues and total employment, and that the latter effect was attenuated in industries with high elasticity of substitution between agency and nonagency workers. We also find that labor misallocation increased as a consequence of the regulation. A model of labor demand in the presence of agency work rationalizes these results. (JEL J22, J23, J31, K31, L60, M51, O15)