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Individual Dismissals in Europe and the United States: A Model on the Influence of the Legal Framework on Firing Costs

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  • Miguel Malo

    ()

  • Joaquín Pérez

    ()

Abstract

In this article, we present a model of individual dismissals based on the workers' right to file a suit against their employer arguing that the dismissal is unjustified or unfair. The model is a standard pre-trial bargaining game between a firm and a worker. We study two cases: when the law states the severance pay for unfair dismissal (the European case), and when judges can decide freely on the compensation to be paid to the worker (the American case). The model provides some guidelines for Labour Law reforms. In the European case, a decrease in the severance pay for unfair dismissals fixed by law will decrease the severance pay offered by the firm, and only under some assumptions will decrease the expected firing cost and will increase the settlement probability. In addition, the transition from the European to the American case is likely to increase the probability of settlement (and to decrease it in the opposite case) with ambiguous effects on agreed severance pay and expected firing costs.

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Bibliographic Info

Article provided by Springer in its journal European Journal of Law and Economics.

Volume (Year): 15 (2003)
Issue (Month): 1 (January)
Pages: 47-63

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Handle: RePEc:kap:ejlwec:v:15:y:2003:i:1:p:47-63

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Web page: http://www.springerlink.com/link.asp?id=100264

Related research

Keywords: unfair dismissal; individual dismissal; severance pay; firing costs; Labour Law;

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References

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  1. Spier, Kathryn E, 1992. "The Dynamics of Pretrial Negotiation," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 93-108, January.
  2. Bertola, Giuseppe, 1990. "Job security, employment and wages," European Economic Review, Elsevier, vol. 34(4), pages 851-879, June.
  3. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
  4. Miguel �. Malo, 2000. "A Simple Model of Severance Pay Determination: The Case of Individual Dismissals in Spain," LABOUR, CEIS, vol. 14(2), pages 269-290, 06.
  5. Miguel Malo, 2001. "European Labour Law and Severance Pay Determination in Collective Redundancies," European Journal of Law and Economics, Springer, vol. 12(1), pages 73-90, July.
  6. William M. Landes, 1974. "An Economic Analysis of the Courts," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 164-214 National Bureau of Economic Research, Inc.
  7. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  8. Simon Deakin & Frank Wilkinson, 1999. "The Management of Redundancies in Europe: The Case of Great Britain," LABOUR, CEIS, vol. 13(1), pages 41-89, 03.
  9. Bentolila, Samuel & Saint-Paul, Gilles, 1992. "A Model of Labour Demand with Linear Adjustment Costs," CEPR Discussion Papers 690, C.E.P.R. Discussion Papers.
  10. Emerson, Michael, 1988. "Regulation or deregulation of the labour market : Policy regimes for the recruitment and dismissal of employees in the industrialised countries," European Economic Review, Elsevier, vol. 32(4), pages 775-817, April.
  11. Walter Y. Oi, 1962. "Labor as a Quasi-Fixed Factor," Journal of Political Economy, University of Chicago Press, vol. 70, pages 538.
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Citations

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Cited by:
  1. Christian Grund, 2004. "Severance Payments for Dismissed Employees Severance Payments for Dismissed Employees in Germany," Bonn Econ Discussion Papers bgse4_2004, University of Bonn, Germany.
  2. Goerke, Laszlo & Pannenberg, Markus, 2009. "An economic analysis of dismissal legislation: Determinants of severance pay in West Germany," Center for European, Governance and Economic Development Research Discussion Papers 87, University of Goettingen, Department of Economics.
  3. Christian Grund, 2006. "Severance payments for dismissed employees in Germany," European Journal of Law and Economics, Springer, vol. 22(1), pages 49-71, July.
  4. Goerke, Laszlo & Pannenberg, Markus, 2009. "An economic analysis of dismissal legislation: Determinants of severance pay in West Germany," Center for European, Governance and Economic Development Research Discussion Papers 87, University of Goettingen, Department of Economics.
  5. Frick, Bernd & Malo, Miguel A. & Garcia Martinez, Pilar & Schneider, Martin, 2012. "The Demand for Individual Grievance Procedures in Germany and Spain: Labour Law Changes versus Business Cycle/La demanda de reclamaciones laborales individuales en Alemania y España: Derecho Laboral ," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 30, pages 283-310, Abril.
  6. Pilar García-Martínez & Miguel Malo, 2007. "The strategic use of dismissal legislation: an empirical analysis using Spanish data," European Journal of Law and Economics, Springer, vol. 23(2), pages 151-167, April.

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