Job Security as an Endogenous Job Characteristic

Elke Jahn and Thomas Wagner ()
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Thomas Wagner: University of Applied Sciences, Postal: Burgschmietstr. 18, 90419 Nuremberg, Germany,

No 08-6, Working Papers from University of Aarhus, Aarhus School of Business, Department of Economics

Abstract: This paper develops a hedonic model of job security (JS). Workers with heterogeneous JS-preferences pay the hedonic price for JS to employers, who incur labor-hoarding costs from supplying JS. In contrast to the Wage-Bill Argument, equilibrium unemployment is strictly positive, as workers with weak JS-preferences trade JS for higher wages. The relation between optimal job insecurity and the perceived dismissal probability is hump-shaped. If firms observe demand, but workers do not, separation is not contractible and firms dismiss workers at-will. Although the workers are risk-averse, they respond to the one-sided private information by trading wage-risk for a higher JS. With two-sided private information, even JS-neutral workers pay the price for a JS guarantee, if their risk premium associated with the wage-replacement risk is larger than the social net loss from production.

Keywords: job security; hedonic market; implicit contract theory; guaranteed employment contract; severance pay contract; asymmetric information; prudence (search for similar items in EconPapers)
JEL-codes: D86 J41 J65 K31 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2008-04-01
New Economics Papers: this item is included in nep-bec, nep-cta, nep-lab and nep-law
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