Job-Security Provisions and Incomplete Markets

We study the effects of job-security provisions through the lens of a search-matching model with risk-neutral employers, risk-averse workers and incomplete asset markets. This setting limits the ability of agents to reallocate payments over time, and thereby to undo any mandatory transfer between them – a neutrality result known as the ’bonding critique’. We quantify the importance of this mechanism under common parameter values and find that mandatory transfers from the employer to the employee can have large negative effects on labor market equilibrium. Our findings show that the neutrality result with respect to job-security provisions breaks down in a model where there is scope for employment protection.