Unlocking the potential: Examining Chile’s 2007 temporary worker labor reform as a key to boosting productivity in micro-firms

Abstract

Microfirms often rely on temporary workers to lower costs and maintain flexibility, but this can also hinder their ability to attract high-quality employees and build valuable human capital. Using Atkinson’s flexible firm theory, we explore the 2007 reform in Chile that equalized pay, rights, and protections for temporary agency workers (TAWs). We find a significant treatment effect on labor productivity but not on overall productivity. Despite fears of significantly increased labor costs from such laws for microfirms, microfirms experienced neutral to positive effects on performance. As businesses increasingly rely on temporary workers, the findings have organizational and policy implications for legal mandates on providing them equal rights.