Dismissal Disputes and the Incentives to Bargain: Estimates of the Contract Zone

In many countries the arbitration of dismissal disputes by public tribunals and state agencies is regarded as slow and expensive. Some common law countries, including the United States and Australia, are privatizing dispute resolution on the premise that this is more efficient than using statutory channels, and it is thus perceived as a better method of settling disputes. Previous advances in statutory law regarding the arbitration of dismissal disputes have been either rescinded or circumvented, sometimes with dramatic political consequences. Little is known, however, about the extent to which statutory law induces inefficiency and redistribution. The author uses settlement and arbitration cost information derived from both Australian courts and survey research for the period 2001–2008 to estimate the contract zone of average settlements, that is, the legal, stigmatic and uncertainty costs saved by averting arbitration. He finds that dispute resolution under statutory law is not as wasteful as it initially seems, nor are substantial resources redistributed from business owners to labor suppliers.