Labor Market Responses to Employer Liability

The labor market in the United States has always been more flexible than labor markets of other Western societies. American employers have been relatively unencumbered in dismissing poor performers or adjusting the labor force in response to exogenous changes in product demand, technological change, or the competitive environment. Recently, however, state judiciaries have adopted a number of wrongful-termination doctrines that challenge the "employment-at-will" rule. This report provides the first empirical estimates of the aggregate effects of wrongful termination. It outlines the major exceptions to employment at will that have been adopted by state court jurisdictions. It also examines the timing and pattern of state adoption of the new doctrines. In an econometric analysis, it identifies those political, legal, and economic factors that are correlated with, and possibly causes of, the changes in court views of employee job protection. The authors also consider the economic factors that may have induced changes in the legal environment to derive reliable causal inferences about the subsequent effect on labor markets. The authors also evaluate the likely consequences of the legal changes for the behavior of business decisionmakers and derive testable implications for labor-market outcomes. Finally, they present their empirical findings on state-level employment effects that can be linked to expanding liabilities. The findings suggest that the indirect effects of wrongful-termination doctrines are 100 times more costly than the direct legal costs of jury awards, settlements, and attorney fees. Whether or not these changes are desirable depends upon whether or not there are compensating benefits to employees, firms, or society at large.