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A Pure Theory of Job Security and Labour Income Risk

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  • Giuseppe Bertola

Abstract

Models of labour market equilibrium where forward-looking decisions maximize both profits and labour income on a risk-neutral basis offer valuable insights into the effects of employment protection legislation. Since risk-neutral behaviour in the labour market presumes perfect insurance, however, job security provisions plays no useful role in such models. This paper studies a stylized model of dynamic labour market interactions where labour reallocation costs are partly financed by uninsured workers' consumption flows. In the resulting second-best equilibrium, provisions that shift labour reallocation costs to risk-neutral employers can increase productive efficiency if their administrative dead-weight costs are not too large, and increase workers' welfare as long as employers' firing costs at least partly finance workers' mobility. Copyright 2004, Wiley-Blackwell.

Suggested Citation

  • Giuseppe Bertola, 2004. "A Pure Theory of Job Security and Labour Income Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(1), pages 43-61.
    • Handle: RePEc:oup:restud:v:71:y:2004:i:1:p:43-61
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    File URL: http://hdl.handle.net/10.1111/0034-6527.00275
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    More about this item

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General

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