If a firm has severe restrictions on firing anyone, then it must be extremely diligent with hiring, because employees will be around as long as they want to be. If an employee is unproductive, lazy, or just a bad fit, then the firm will be stuck giving a paycheck to someone who really ought not to be there. Thus firms will simply delay hiring.

> > giving people broad latitude is risky

I admit, I'm not exactly sure what this means, but I would surmise it means that employees need to be micromanaged to ensure loyalty to the firm, since they have no natural consequences of going rogue.

> > compensation suffers because high comp is risky

If the firm grants significant pay increases but cannot terminate someone, that pay increase becomes a permanent recurring expense, even if some future event renders that pay increase inappropriate or unnecessary. Thus firms will minimize pay increases.

These are "deadweight losses" where optimal exchange between employers and employees is limited by some policy.