A previous post asks: "Has labour market rigidity been hindering the performance of Portuguese firms?" So let me take this opportunity to mention one of my papers that addresses specifically this issue - here's the link.
The analysis compares the changes in the performance of firms that were able to dismiss workers for cause in a slightly less burdensome way following the 1989 labour law reform (probably the most important labour reform since 1975) with similar firms but that did not benefit from such streamlined approach.
The results indicate that the performance levels of the former group increased significantly compared to the latter. One possible explanation is that workers behaved differently once they realised that the burocracy of the law did not protect them in the same way as before, especially the one or two "rotten apples" that can be so detrimental to the overall performance of their firms - and therefore the wages of their colleagues.
Although this evidence is relatively old (unfortunately there are not many labour reforms in Portugal for one to study!), this problem appears to remain relevant in 2011. For instance, the CEO's of Jerónimo Martins and BPI have recently emphasised the importance of streamlining individual dismissals. However, the constitutional court declared void the timid changes in that direction that resulted from the 2009 review of the Labour Code.