This paper investigates the effect of firing costs on total factor productivity (TFP) and resource allocation. Exploiting heterogeneous changes in firing costs across employee types in Belgium, we find that increasing firing costs reduce firm-level TFP. Firms facing a net increase in firing costs reduce hiring and firing, increase hours worked per employee, adjust the composition of their workforce away from employee types whose firing costs have increased, and rely more on outsourced employees. Instead, we find no evidence of capital-intensive technology adoption. The decline in TFP is smaller for firms with better access to credit.
