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We investigate how firing costs affect input choices and total factor productivity (TFP)
by exploiting a labor reform in Belgium that increased firing costs of blue-collar workers
relative to white-collar workers. Using a difference-in-differences design, we show that
hiring and separations at blue-collar-intensive firms declined by 8 percent after the
reform relative to white-collar-intensive firms. Moreover, blue-collar-intensive firms
shifted workforce composition toward white-collar workers, offered fewer permanent
contracts, and relied more on outsourced labor. We find no evidence of capital-intensive
technology adoption and only little evidence of human capital investment. Ultimately,
blue-collar-intensive firms experienced a 4.8 percent decline in TFP.
