It certainly would be terrible for morale if implemented thoughtlessly. But if it was done in a way with clear expectations of employee performance, then terminations would not be arbitrary. And the morale hit of being terminated at any time- a situation with legally exists in California atm anyway- would be mitigated by more companies being quicker to hire instead of forcing long arduous interview processes.
So then the situation becomes "If mgmt. is just, then they will keep me on, if they are dumb, then I can get quickly hired across the street anyway."