JOB SECURITY AND LABOR-MARKET FLEXIBILITY

This paper discusses the desirability of government-legislated job security. Job security may be beneficial to employed workers, but it can also impose a cost on unemployed workers by lowering labour market turnover and thereby increasing the average duration of unemployment spells. This externality can lead to self-reinforcing behaviour between workers at different firms: If most workers in the economy have job security then turnover will be low and the duration of unemployment following a layoff is likely to be high. As a result, other workers will also desire job security. Even in the absence of legislation, therefore, the externality may result in more job security being provided than is socially desirable.