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-differences 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 non-agency 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.