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The Law and Economics of Discharge

J. H. Verkerke, University of Virginia School of Law

Article comments

(The chapter is forthcoming in a volume called “Labor and Employment Law and Economics” to be published later this year as part of Edward Elgar Publishing’s second edition of the Encyclopedia of Law and Economics)

Abstract

This chapter focuses on economic analysis of the legal rules governing involuntary termination of the employment relationship. It describes the legal framework governing discharge in the US and compares those rules to job security provisions in other countries. I also offer a critical review of the theoretical and empirical literature on employment protection. Aside from the observation that increased firing costs will reduce turnover, economic theory produces mostly ambiguous predictions that depend on the structure of the model and assumptions about crucial parameters. Contrary to an oft-cited assertion in Lazear (1990), there is no feasible employment contract that ensures Coasean invariance to legally mandated firing costs. An extensive empirical literature broadly supports the notion that employment protection reduces aggregate employment, but other results have been decidedly mixed. Nevertheless, the available empirical evidence casts doubt on many of the market failure stories that advocates of legally mandated just cause protection offer to explain the prevalence of at-will contracts at private sector employers. The chapter concludes by proposing a new approach to measuring legal variables for the purposes of estimating their effect on the US labor market. First, we should focus on the marked differences among jurisdictions in the stringency of their employment law doctrines. Second, we should model explicitly the process by which both multi-state employers and cross-jurisdictional influences create powerful spillover effects.

Subject Area

Employment Practice, Labor Law, Law and Economics

Recommended Citation

J. H. Verkerke, "The Law and Economics of Discharge" (June 2008). University of Virginia Legal Working Paper Series. University of Virginia John M. Olin Program in Law and Economics Working Paper Series. Working Paper 50.
http://law.bepress.com/uvalwps/olin/art50

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