The Impact of Extended Employment Protection Laws on the Demand for Temporary Agency Workers

The incidence of alternative work arrangements has risen during recent decades, affecting the shape of the economy and leading to calls for changes in labor regulation. In this paper, we study the demand for temporary agency work (TAW) and the effects of a reform in Chile that increased the regulatory burden on TAW. In examining a sample of manufacturing plants, we not only show that plant-level volatility and relative size are key determinants of the demand for TAW, but also that both characteristics became more important after the change in regulation. We also evaluate the effects of the regulation on the plants’ performance. We find that plants using TAW increased their share of non-agency workers by around 12%, while their total employment shrank by 7% as a response to the regulation. Reassuringly, plants with higher shares of agency workers -consequently more exposed to the regulatory change- experienced larger changes in employment. Finally, we only find partial evidence of a differential negative effect on output, and we do not detect any significant impact of this regulation on value added.