Tenure: Can it be Explained by an 'Efficiency Wage' Agrument

A two -period efficiency wage model is constructed to show that granting tenure may be a rational choice by a firm. The driving force is the idea that tenure has value to the employee who receives it. Consequently the turnover cost of tenured employees is lower than that of untenured. The difference is the benefit the firm draws from granting tenure. The cost involves the firm's commitment to employ the tenured employees at the second period. The fraction of tenured employees in the firm's labor force is the variable whose optimal choice maximizes the present value of profits