Job Security, Stability and Production Efficiency

Abstract

We study a 2-sided labor market with a set of heterogeneous firms and workers in an environment where jobs are secured by regulation. Without job security Kelso and Crawford have shown that stable outcomes and efficiency prevail when all workers are (weak) gross substitutes to each firm, in the sense that increases in other workers' salaries can never cause a firm to withdraw an offer from a worker whose salary has not risen. It turns out that by introducing job security, stability and efficiency may still prevail, and even for a significantly broader class of production functions.