Labor Disputes and Job Flows

This article uses variations in local conditions of the activity of the labor courts to assess the effect of dismissal costs on the labor market. Judicial activity is analyzed using a data set of individual labor disputes brought to French courts over the years 1996 to 2003. Several indicators are computed: the percentage of dismissed workers who litigate in employment tribunals, the fraction of cases leading to a conciliation between parties, to a trial, resulting in a worker's victory. First, we present a simple theoretical framework helping us understand the links between litigation costs, judicial outcomes and firing costs. Court outcomes are not exogenous to market conditions but also to litigation costs: a large filing rate can come from small litigation costs for the workers, leading to large dismissal costs for the firms; it may well come from small litigation costs for the firms, the employers taking more risks when firing workers. Second, we regress job flows on indicators of judicial outcomes, using an instrument, based on local shocks in the supply of lawyers. We 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 decrease in employment fluctuations, especially for shrinking or exiting firms. The effect on employment growth is positive in the short term.