The Costs of Wrongful-discharge Laws

📖 The Scoop

We estimate the effects on employment and wages of wrongful-discharge protections in the United States. Over the last three decades, most U.S. state courts have adopted one or more common law wrongful-discharge doctrines that limit employers' discretion to terminate workers at-will. Using this cross-state variation with a difference-in-difference framework, we find robust evidence of a modest negative impact ( -0.8 to -1.6 percentage points) of one wrongful-discharge doctrine, the implied-contract exception, on employment to population rates in state labor markets. The short-term impact is most pronounced for female, younger, and less-skilled workers, while the longer term costs appear to be borne by older and more-educated workers - those most likely to litigate under this doctrine. We find no robust employment or wage effects of two other widely recognized wrongful-discharge laws: the public-policy and good-faith exceptions. Published findings in the literature range from no effect to very large negative effects. We re-analyze the two leading studies and find the discrepancies can be explained by methodological shortcomings in the one case and limitations in the coding of key court decisions in the other. Keywords: Employment Protection, Wrongful Discharge, Unjust Dismissal, Employment at Will, Labor Law, Instrumental Variables. JEL Classification: E24, J23, J32, J38, J83, K12, K31.

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