We develop a theoretical model of firm dynamics with search frictions and asymmetric firing costs for temporary and permanent workers (dual employment protection legislation, DEPL). We characterize the equilibrium labor composition that firms with different productivity choose over their life cycle, and we study the effect of DEPL on the distribution of firms' size and productivity. The results indicate that DEPL play similar role as a tax to big firms and a subsidy to small firms (size-dependent-policies) by distorting firm selection as well as the allocation of resources across firms, and thus generating a decline in the level of TFP. Consistent with the evidence documented in this paper, in spite of having similar labor productivity by firms' size-classes, countries with stricter DEPL that incentives or extend the use of temporary contracts have relatively smaller firms (that concentrate a higher fraction of employment), and lower aggregate productivity. In this sense the model provides new insights into the sources of the considerable differences in the firm-size distributions across countries.