Job security and unemployment in an efficiency-wage model

Job security and its effects on unemployment are controversial issues. I investigate the effects of job security in an efficiency-wage model of unemployment. Though efficiency-wage ideas have wide appeal and provide strong foundations of involuntary unemployment, not much has been written about the ramifications of job security in these scenarios. I show that job security creates wage and unemployment effects when efficiency-wage aspects are relevant, because employment guarantees shift the burden of workers' effort attraction to the wage mechanism. These effects are further enhanced when workers have some bargaining power. My results, therefore, suggest a trade-off between employment stability and employment: High employment security leads to smaller employment (or larger involuntary unemployment). I thank Ron Oaxaca and participants at the W.E. Upjohn Conference on Unemployment Insurance for useful comments.