Exploiting intertemporal variations in employment protection across OECD countries, we show that laws increasing employee protection (EPL) positively impact operating profits over the 1985-2013 period. This result does not seem to be driven by pre-treatment differences between treatment and control firms and is robust to a long list of sensitivity checks and alternative design choices. Consistent with the EPL effect being due to changes in employment protection laws, the evidence also indicates that the effect is largely driven by the labor-intensive firms. While firms reduce employment and capital expenditures after an increase in employee protection, we find little evidence that they reduce their sales volumes, consistent with EPL increasing labor productivity. The positive EPL effect disappears as the level of unionization in a country increases, consistent the notion that very high levels of employee protection reduce firms’ operating flexibility and can result in lower operating profitability.