IDEAS home Printed from https://ideas.repec.org/a/eee/irlaec/v29y2009i1p38-45.html
   My bibliography  Save this article

Employment effect of dismissal pay in the presence of judicial mistakes

Author

Listed:
  • Huang, Chun-chieh
  • Chang, Juin-jen
  • Lai, Ching-chong

Abstract

Existing studies either overlook the importance of the juridical enforcement of employment protection legislation in determining the labor market consequences of dismissal payments or else neglect the possibly judicial biases caused by a tight labor market due to the assumption of exogenous judicial errors. By calling for endogenously determined judicial errors, this paper not only traces the effect of a firing litigation on employment, but also explores the possible effects of labor market conditions on judicial mistakes. We show that worse labor market conditions (a larger dismissal pay) will induce judges to be more favorable toward fired workers (firms). Thus, a higher level of unemployment (a larger dismissal pay) will decrease (increase) the possibility of a type-1 error and increase (decrease) the possibility of a type-2 error. It is also shown that, while a policy that lowers a type-1 error will increase the employment level, a lower type-2 error, somewhat surprisingly, will not necessarily have a positive effect on employment. Besides, in departing from the findings of previous analyses, we find that dismissal pay can either increase or decrease the employment level, with this crucially depending on the probability of juridical mistakes.

Suggested Citation

  • Huang, Chun-chieh & Chang, Juin-jen & Lai, Ching-chong, 2009. "Employment effect of dismissal pay in the presence of judicial mistakes," International Review of Law and Economics, Elsevier, vol. 29(1), pages 38-45, March.
    • Handle: RePEc:eee:irlaec:v:29:y:2009:i:1:p:38-45
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0144-8188(08)00038-0
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
    2. Burda, Michael C, 1992. " A Note on Firing Costs and Severance Benefits in Equilibrium Unemployment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(3), pages 479-489.
    3. Giuseppe BERTOLA & Tito BOERI & Sandrine CAZES, 2000. "Employment protection in industrialized countries: The case for new indicators," International Labour Review, International Labour Organization, vol. 139(1), pages 57-72, March.
    4. Samuel Bentolila & Giuseppe Bertola, 1990. "Firing Costs and Labour Demand: How Bad is Eurosclerosis?," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(3), pages 381-402.
    5. E. Galdon-Sanchez, Jose & Guell, Maia, 2003. "Dismissal conflicts and unemployment," European Economic Review, Elsevier, vol. 47(2), pages 323-335, April.
    6. Bentolila, S. & Saint-Paul, G., 1995. "A model of labour demand with linear adjustment costs," Labour Economics, Elsevier, vol. 2(1), pages 105-105, March.
    7. Bertola, Giuseppe, 1992. "Labor Turnover Costs and Average Labor Demand," Journal of Labor Economics, University of Chicago Press, vol. 10(4), pages 389-411, October.
    8. Amable, Bruno & Gatti, Donatella, 2002. "Macroeconomic effects of product market competition in a dynamic efficiency wage model," Economics Letters, Elsevier, vol. 75(1), pages 39-46, March.
    9. Caballero, Ricardo J. & Hammour, Mohamad L., 1998. "Jobless growth: appropriability, factor substitution, and unemployment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 51-94, June.
    10. Snyder, Edward A, 1990. "The Effect of Higher Criminal Penalties on Antitrust Enforcement," Journal of Law and Economics, University of Chicago Press, vol. 33(2), pages 439-462, October.
    11. Levine, David I, 1989. "Just-Cause Employment Policies When Unemployment Is a Worker Discipline Device," American Economic Review, American Economic Association, vol. 79(4), pages 902-905, September.
    12. Groenewold, Nicolaas, 1999. "Employment Protection and Aggregate Unemployment," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 619-630, July.
    13. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    14. James Andreoni, 1991. "Reasonable Doubt and the Optimal Magnitude of Fines: Should the Penalty Fit the Crime?," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 385-395, Autumn.
    15. Ichino, Andrea & Polo, Michele & Rettore, Enrico, 2003. "Are judges biased by labor market conditions?," European Economic Review, Elsevier, vol. 47(5), pages 913-944, October.
    16. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    17. Gilles Saint-Paul, 1995. "Efficiency Wage, Commitment and Hysteresis," Annals of Economics and Statistics, GENES, issue 37-38, pages 39-53.
    18. Cahuc, Pierre & Zylberberg, Andre, 1999. "Redundancy Payments, Incomplete Labor Contracts, Unemployment and Welfare," IZA Discussion Papers 96, Institute of Labor Economics (IZA).
    19. Sjostrom, William, 1993. "Job security in an efficiency wage model," Journal of Macroeconomics, Elsevier, vol. 15(1), pages 183-187.
    20. Carter, Thomas J. & De Lancey, Paul R., 1997. "Just, Unjust, and Just-Cause Dismissals," Journal of Macroeconomics, Elsevier, vol. 19(3), pages 619-628, July.
    21. Goerke, Laszlo, 2002. "On dismissal pay," Labour Economics, Elsevier, vol. 9(4), pages 497-512, September.
    22. repec:adr:anecst:y:1995:i:37-38:p:03 is not listed on IDEAS
    23. Fella, Giulio, 2000. "Efficiency wage and efficient redundancy pay," European Economic Review, Elsevier, vol. 44(8), pages 1473-1490, August.
    24. Heijdra, Ben J. & Ligthart, Jenny E., 2002. "The hiring subsidy cum firing tax in a search model of unemployment," Economics Letters, Elsevier, vol. 75(1), pages 97-108, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Goerke, Laszlo & Pannenberg, Markus, 2010. "An economic analysis of dismissal legislation: Determinants of severance pay in West Germany," International Review of Law and Economics, Elsevier, vol. 30(1), pages 71-85, March.
    2. Goerke, Laszlo & Neugart, Michael, 2015. "Lobbying and dismissal dispute resolution systems," International Review of Law and Economics, Elsevier, vol. 41(C), pages 50-62.
    3. repec:got:cegedp:87 is not listed on IDEAS

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Benoît Pierre FREYENS, 2010. "Measuring firing costs: The case for direct methods," International Labour Review, International Labour Organization, vol. 149(3), pages 287-313, September.
    2. Boeri, Tito & Garibaldi, Pietro & Moen, Espen R., 2017. "Inside severance pay," Journal of Public Economics, Elsevier, vol. 145(C), pages 211-225.
    3. Fella Giulio, 2012. "Matching, Wage Rigidities and Efficient Severance Pay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-35, December.
    4. E. Galdon-Sanchez, Jose & Guell, Maia, 2003. "Dismissal conflicts and unemployment," European Economic Review, Elsevier, vol. 47(2), pages 323-335, April.
    5. Laszlo Goerke, 2006. "Earnings‐related Severance Pay," LABOUR, CEIS, vol. 20(4), pages 651-672, December.
    6. Eguchi Kyota, 2008. "Damages or Reinstatement: Incentives and Remedies for Unjust Dismissal," Review of Law & Economics, De Gruyter, vol. 4(1), pages 443-474, December.
    7. repec:hal:spmain:info:hdl:2441/7hh2up94ii8d2rg9pa9vg9eh3t is not listed on IDEAS
    8. Pierre, Gaëlle & Scarpetta, Stefano, 2004. "Employment Regulations through the Eyes of Employers: Do They Matter and How Do Firms Respond to Them?," IZA Discussion Papers 1424, Institute of Labor Economics (IZA).
    9. Groenewold, Nicolaas, 1999. "Employment Protection and Aggregate Unemployment," Journal of Macroeconomics, Elsevier, vol. 21(3), pages 619-630, July.
    10. Andrea Vindigni & Simone Scotti & Cristina Tealdi, 2015. "Uncertainty and the Politics of Employment Protection," Journal of Labor Economics, University of Chicago Press, vol. 33(1), pages 209-267.
    11. Besancenot, Damien & Vranceanu, Radu, 2009. "Multiple equilibria in a firing game with impartial justice," Labour Economics, Elsevier, vol. 16(3), pages 262-271, June.
    12. repec:eee:labchp:v:3:y:1999:i:pc:p:2985-3028 is not listed on IDEAS
    13. Eguchi, Kyota, 2007. "Productivity loss and reinstatement as a legal remedy for unjust dismissal," Journal of the Japanese and International Economies, Elsevier, vol. 21(1), pages 78-105, March.
    14. Fella, Giulio, 2000. "Efficiency wage and efficient redundancy pay," European Economic Review, Elsevier, vol. 44(8), pages 1473-1490, August.
    15. Stähler, Nikolai, 2008. "Firing costs, severance payments, judicial mistakes and unemployment," Labour Economics, Elsevier, vol. 15(6), pages 1162-1178, December.
    16. Carmen Pagés-Serra, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2000), pages 109-154, August.
    17. Claudio Montenegro & Carmen Pagés, 2005. "Who Benefits from Labor Market Regulations? Chile 1960-1998," Central Banking, Analysis, and Economic Policies Book Series, in: Jorge Restrepo & Andrea Tokman R. & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Edi (ed.),Labor Markets and Institutions, edition 1, volume 8, chapter 4, pages 077-114, Central Bank of Chile.
    18. John T. Addison & Paulino Teixeira & Jean‐Luc Grosso, 2000. "The Effect of Dismissals Protection on Employment: More on a Vexed Theme," Southern Economic Journal, John Wiley & Sons, vol. 67(1), pages 105-122, July.
    19. Garibaldi, Pietro, 1998. "Job flow dynamics and firing restrictions," European Economic Review, Elsevier, vol. 42(2), pages 245-275, February.
    20. Garibaldi, Pietro & Violante, Giovanni, 2002. "Firing Tax and Severance Payment in Search Economies: A Comparison," CEPR Discussion Papers 3636, C.E.P.R. Discussion Papers.
    21. Fella Giulio, 2012. "Matching, Wage Rigidities and Efficient Severance Pay," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(1), pages 1-35, December.
    22. Carmen Pagés-Serra & James J. Heckman, 2000. "El costo de la regulación de la estabilidad laboral: elementos de juicio de los mercados laborales latinoamericanos," Research Department Publications 4228, Inter-American Development Bank, Research Department.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:irlaec:v:29:y:2009:i:1:p:38-45. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/irle .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.