Job Security Policies and Trade Union Behaviour in an Open Economy

In this paper, the authors analyze how job security policies, which in practice result in higher firing costs, affect long-run employment and investment in a two-country model with free trade in goods and capital. The effects turn out to depend crucially on the preferences of trade unions and, in particular, on the degree of wage flexibility. If wages are downward inflexible, job security policies give rise to a clear trade-off between achieving low employment variability over the business cycle and a good employment and investment performance in the long run.