Bryan poses the issue of why bosses are reluctant to fire unproductive employees. My observations:
1. Firing involves a confrontation. You tend to want to avoid confrontations. In large organizations, the confrontation is indirect. The boss tells HR, and HR sends an angel of death to give the employee the news.
2. Much of the cost of a bad employee is borne by his co-workers. The boss may bear less of the cost. Remember that many workers are Garett Jones workers, operating in teams. Even if one worker does very little, the team may produce the desired increment of organizational capital--a new reporting system, a new marketing campaign, or what have you. Note that the relevant choice is "retain or fire" rather than "raise pay or lower pay." With Garett Jones workers, the value of a worker to a firm tends to be either well above the cost of compensation or close to zero. The concept of equating wage to marginal product does not apply.
3. Don't assume that co-workers know who is unproductive. I remember when employee X thought that I was unwisely retaining employee Y, who was weak technically, and that I failed to appreciate employee Z, who was technically brilliant. Then I took a different job and employee X was promoted to my job. What he learned was that employee Z was completely undisciplined and it was a good thing that employee Y was around to make sure projects were completed on time. Employee X told me that I had been right all along.
All this said, I think that firing low-quality workers is a tremendous way to boost morale in an organization. It sends a message that you care about what the team does and that you are paying attention to who is helping and who is not. It increases workers' sense that they are getting what they deserve.
I think that it is a mistake for an organization to cultivate a belief that bad workers can be rehabilitated. I am sure that sometimes rehabilitation is possible, but on average the costs of trying far exceed the benefits. Middle managers have much better things to do with their time than spend it attempting to rehabilitate a weak employee. If I were a high-level executive, I would try to create a culture of firing as opposed to a culture of rehabilitation. I would rather see someone occasionally fired who might have worked out if given a chance than see lots of effort going into retaining employees who are not going to help.