We study the impact of a reform that extended employment protection to temporary agency workers. Using a difference-indifferences 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.

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