Labor Disputes and Job Flows

Using a data set of individual labor disputes brought to French courts over the years 1996 to 2003, the authors use variations in local conditions of the activity of the labor courts to assess the effect of dismissal costs on the labor market. First, the authors present a simple theoretical framework to explain the links between litigation costs, judicial outcomes, and firing costs. Second, they regress job flows on indicators of judicial outcomes, using an instrument, based on local shocks in the supply of lawyers. They find that when the numbers of lawyers increase, workers litigate more often, which should increase the firing costs for the firms. This increased filing rate causes a large decrease in employment fluctuations, especially for shrinking or exiting firms. The total effect on employment growth is slightly positive, and this result is more sensitive to the adopted specification.