Are Judges Sensitive to Economic Conditions? Evidence from UK Employment Tribunals

In the UK, dismissed workers can sue their ex-employers for unfair dismissal. This paper investigates whether judges deciding on such cases are sensitive to economic conditions faced by firms and workers. In bad times, getting fired is more costly for workers, while at the same time firms find firing costs harder to bear. How do judges decide? I use British data on individual unfair dismissal and redundancy payment cases brought to Employment Tribunals in 1990-1992. Controlling for case selection, I find that, when the dismissed worker has found a new job, higher unemployement and bankruptcy rates both have a negative impact on the worker’s probability of pervailing at trial. However, when dismissed workers are still unemployed, a higher unemployment rate has a positive impact on their probability of winning. On the whole population of cases brought to trial, a one point increase in the unemployment rate leads to a 7 points decrease in the probability of judges deciding in favour of dismissed employees. An increase in the bankruptcy rate has a similar effect. These findings are consistent with the idea that judges maximize the joint welfare of the dismissed worker and the firm, tailoring firing costs to local and individual economic circumstances.