The employment contract

Abstract

"Economic analyses of dismissal protection often assume that there is a conflict of interests between social safeguards and efficiency. Here it is often overlooked that dismissal protection may also positively affect efficiency. Protection for social considerations may increase efficiency, if the analysis takes imperfections of the labour markets (e.g. information asymmetries) into account. Game theory models can illustrate that the duration of the employment contract may be very significant for the development of cooperative behaviour. Dismissal protection permits both parties to the employment contract to plan for a longer period ot time (unlimited from the start). This supports the process of formation of trust and of stabilization of expectations which in turn increases the parties' willingness fo finance human capital investments for the benefit of the partner and increasing productivity. Like the effects on efficiency, the distribution effects of dismissal protection are not always uniform. Dismissal protection merely safeguard existing employment contracts, not workers without employment. One should also bear in mind that even if dismissal protection regulations promote efficiency this does not answer the question which type of regulations is most suitable (e.g. by collective agreement or legislation)." (Author's abstract, IAB-Doku) ((en))

Cite article

Buttler, F. & Walwei, U. (1994): The employment contract. Cooperation requires stability. In: IAB Labour Market Research Topics No. 7, p. 1-8.