5. Conclusion
We study how some crucial decisions that people must make outside of the labor market affect performance and productivity in the labor market and vice versa, i.e., how labor market conditions affect workers’ willingness to get involved in long-term projects. Having a strong degree of stability in employment has been one of the historical main aspirations of the working population. Trade unions have pursued employment protection (dismissal barriers) as a mechanism to help achieve this stability. There are two polar cases. In environments such as the private sector in the U.S., dismissal is typically on an at-will basis, so that insecurity about future employment is likely to deter such investment. At the other extreme, non-performance-based and permanent dismissal barriers (present to some degree in many European labor markets) provide little or no incentive for workers to perform at a high level. This may have a very adverse effect on worker productivity and firm profitability. In this article, we examine how labor market decisions are affected by incorporating the opportunity for workers to invest in long-term projects. Contrary to the theoretical predictions with selfish preferences, we find that the mere presence of long-term projects acts as an effortenforcement device. This result seem to be driven by an increase in long-term relationships. Workers perceived additional incentives to enhance their performance when they had the option of investing in a long-term project. We also study the importance of connecting job security to performance by introducing dismissal barriers that are based on recent performance and comparing it with non performance-based dismissal barriers.
