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Layoffs and Litigation

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Author Info
Paul Oyer
Scott Schaefer

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Abstract

This paper studies a possible link between two trends that have affected the labor market over the last decade: increases in wrongful termination litigation and increasing frequency of mass layoffs. We model the displacement strategy of a firm faced with concave displacement costs and employees who vary in productivity. The firm has some periods of "layoffs," where it displaces a relatively large group, and other periods where it engages in selective "firings" of only the least productive employees. We show that layoffs and firings are substitutes and that the set of steady-state policies shifts in the direction of smaller firings and larger layoffs as the cost of firings increases. We explore the relationship between displacement costs and layoff size by considering potential effects of the Civil Rights Act (CRA) of 1991. By increasing most firms' exposure to wrongful termination lawsuits, this legislation made displacements of smaller groups of workers more costly without proportionately affecting the costs of large layoffs. Using data from the Survey of Income and Program Participation (SIPP), we explore the effects of CRA91 using variation in protected status (specifically, race), state Fair Employment Laws, age, and employer size. We find evidence suggesting that CRA91 affected firms' choices about how to displace workers and had especially strong effects on the firing rates of black men.

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Paper provided by Institute for Policy Resarch at Northwestern University in its series IPR working papers with number 98-34.

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Handle: RePEc:wop:nwuipr:98-34

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  1. Adriana Kugler & Giovanni Pica, 2003. "Effects of Employment Protection and Product Market Regulations on the Italian Labor Market," Economics Working Papers 722, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  2. Hernanz, Virginia & Jimeno, Juan Francisco & Kugler, Adriana D., 2003. "Employment Consequences of Restrictive Permanent Contracts: Evidence from Spanish Labour Market Reforms," CEPR Discussion Papers 3724, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Pfann, Gerard A., 2001. "Downsizing," IZA Discussion Papers 307, Institute for the Study of Labor (IZA). [Downloadable!]
  4. Luojia Hu & Christopher Taber, 2007. "Displacement, Asymmetric Information,
    and Heterogeneous Human Capital    ," Staff Working Papers 07-136, W.E. Upjohn Institute for Employment Research. [Downloadable!] (restricted)
  5. David H. Autor, 2000. "Outsourcing at Will: Unjust Dismissal Doctrine and the Growth of Temporary Help Employment," JCPR Working Papers 153, Northwestern University/University of Chicago Joint Center for Poverty Research. [Downloadable!]
    Other versions:
  6. Jose Galdon-Sanchez & Maia Guell, 2000. "Let's go to court! Firing costs and dismissal conflicts," Working Papers 823, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  7. W. Bentley MacLeod & Voraprapa Nakavachara, 2006. "Legal default rules: The case of wrongful discharge laws," Discussion Papers 0506-19, Columbia University, Department of Economics. [Downloadable!]
  8. Pedro S. Martins, 2007. "Dismissals for Cause: The Difference That Just Eight Paragraphs Can Make," IZA Discussion Papers 3112, Institute for the Study of Labor (IZA). [Downloadable!]
  9. Kugler, Adriana & Pica, Giovanni, 2003. "The Effects Of Employment Protection and Product Market Regulations on The Italian Labor Market," Discussion Paper Series In Economics And Econometrics 0310, Economics Division, School of Social Sciences, University of Southampton. [Downloadable!]
    Other versions:
  10. Luojia Hu & Christopher Taber, 2005. "Layoffs, Lemons, Race, and Gender," NBER Working Papers 11481, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Paul Oyer & Scott Schaefer, 2002. "Litigation Costs and Returns to Experience," American Economic Review, American Economic Association, vol. 92(3), pages 683-705, June. [Downloadable!] (restricted)
  12. Daron Acemoglu & Joshua Angrist, 1998. "Consequences of Employment Protection? The Case of the Americans with Disabilities Act," NBER Working Papers 6670, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Kugler, Adriana D. & Pica, Giovanni, 2005. "Effects of Employment Protection on Worker and Job Flows: Evidence from the 1990 Italian Reform," CEPR Discussion Papers 5256, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  14. W. Bentley MacLeod & Voraprapa Nakavachara, 2006. "Legal Default Rules: The Case of Wrongful Discharge Laws," IZA Discussion Papers 1970, Institute for the Study of Labor (IZA). [Downloadable!]
  15. Luojia Hu & Christopher Taber, 2008. "Displacement, asymmetric information and heterogeneous human capital," Working Paper Series WP-08-02, Federal Reserve Bank of Chicago. [Downloadable!]
  16. Bell, David & Heitmueller, Axel, 2005. "The Disability Discrimination Act in the UK: Helping or Hindering Employment Amongst the Disabled?," IZA Discussion Papers 1476, Institute for the Study of Labor (IZA). [Downloadable!]
  17. Adriana Kugler adkugler@uh.edu & Giovanni Pica, 2005. "The Effects of Employment Protection on the Italian Labour Market," CSEF Working Papers 135, Centre for Studies in Economics and Finance (CSEF), University of Salerno, Italy. [Downloadable!]
  18. David H. Autor & John J. Donohue III & Stewart J. Schwab, 2003. "The Costs of Wrongful-Discharge Laws," NBER Working Papers 9425, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  19. Adriana Kugler, 2004. "The Effect of Job Security Regulations on Labor Market Flexibility: Evidence from the Colombian Labor Market Reform," NBER Working Papers 10215, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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