Job Security, Work Incentives and Unemployment

This paper analyzes how firms can use job security as an incentive mechanism. We examine how "macroeconomic job security" (measured by the reemployment probability) may affect productivity differently from "microeconomic job security" (measured be the probability of beeing retained). We describe the circumstances under which job security stimulates work effort. The incumbent workers ("insiders") may have an opportunity to raise their wages above the market-clearing level without beeing replaced by unemployed workers ("outsiders"). In this context, involuntary unemployment can arise.