The High Cost of Just Cause

This month, amid World Cup fever, New York City implemented a new job-protection law. This law forbids app-based rideshare platforms from removing drivers unless they can show they have “just cause” or a “bona fide economic reason.” The new law follows a pattern set by a similar pandemic-era law, also from New York City, which applied the same standards to the fast-food industry.

As examples of political sloganeering, these laws are hard to beat: no one will argue with fairness in firing. But as economic policies, they’re nothing short of an own goal. By making it harder to fire people, they inadvertently discourage businesses from hiring those people in the first place. They also make it harder for already-employed people to switch jobs. They produce, in turn, nothing but bad economics: less market dynamism, worse job matching, and higher unemployment. Perhaps the best that could be said for them is that, in this season of international athletic competition, they make the city look more European—just not in the way anyone had hoped.

An Undesirable Import

Historically, job-protection laws have been rare in the United States. The default rule has been “employment at will”—either the employer or the employee can end the relationship for any reason and at any time. To be sure, this principle has limits: antidiscrimination laws, whistleblower protections, and some common-law rules forbid firings for certain reasons. But in general, employment at will is a widespread and durable feature of American labor law.

That default rule, in turn, has helped keep American labor markets dynamic. Labor-market dynamism is basically a measure of how easily workers move in and out of jobs. If workers can move between jobs with low friction, the market is considered dynamic. And high dynamism is a sign of market health: it means that the labor supply can flow into the sectors where it is most productive.

Job-protection laws, however, push the market in the opposite direction. They affect one side of the labor flow by deliberately making it harder to move people out of jobs. But less deliberately, they also affect the other side of the flow, causing employers to hire fewer workers. The reason is simple: if an employer knows it will have a hard time firing a person, it will be pickier about whom it hires in the first place. And in the long run, employers will hire fewer people overall.

This effect can be measured by comparing U.S. labor markets to European ones. While the United States has few limits, European countries often have robust employment-protection laws. And these laws tend to produce higher overall unemployment. An especially severe case is France: After 1956, France adopted a series of job-protection laws, ranging from advance-notice requirements to mandatory severance payments. And over the next three decades, its unemployment rate shot up from 1% to 10%. Economists have attributed most of that increase to the country’s legal limits on discharge. The loss of labor-market dynamism had real costs.

The City that Never Fires

These data haven’t dissuaded New York City. In 2021, the city enacted the nation’s first “just cause” law. Aimed at the fast-food industry, this law forbids an employer from firing an employee unless the employer has “just cause” or a “bona fide economic reason.” If the employer wants to remove a worker under that standard, it has to make its case through binding arbitration. And if it gets things wrong, it can be liable for both back wages and civil penalties.

Facing those kinds of costs, one could hardly blame a business for hiring fewer workers. But that concern hasn’t yet penetrated New York’s city hall. To the contrary, city lawmakers have extended the just-cause policy to new industries. They recently passed laws that create just-cause protections for app-based rideshare and delivery drivers. And some are calling to extend the just-cause standard to every worker in the city. In effect, they are aiming to eliminate employment at will and make just cause the default rule.

The Price of Protection

That change would be ill-advised. The employment effects would be obvious: over time, job-protection laws tend to reduce total employment. But less obviously, these laws may cause people to stay in the wrong jobs. When changing jobs becomes hard, people tend to cling to the jobs they already have. They do that even though their talents might be better used elsewhere. That means the labor market stops churning, and the labor supply stops flowing to its most productive uses. Markets are less efficient, and everyone is worse off. 

Slow hiring would be a problem for any labor market. But it’s especially bad for markets like those being targeted by New York City. Again, employment-protection laws reduce employment mainly by slowing down hiring. In markets where turnover is low to begin with, the effect will take a while to show up. But in markets with fast turnover, it will appear much more quickly. The harm will be much more immediate. 

In that sense, there are few sectors more vulnerable than fast food and app-based services. In fast food, annual employee turnover can run as high as 130%. The industry employs a large number of young and inexperienced workers, and those workers tend to pass through jobs more quickly. And while firm numbers are harder to come by in the app-based sector, turnover appears to be high there too: some estimates peg it at 97% per year. In other words, each year, almost the entire workforce is, statistically, brand new.

Nor are these markets the only ones at risk. Because fast food and app-based work are so fluid today, they often serve as safety valves for workers in other sectors. A banker who loses his desk job might tide himself over for a few months by using a rideshare app. His rideshare work is basically a bridge: the banker can hold out longer to find a new job while still making ends meet. But if the market becomes more rigid, opportunities will be less abundant. The bridge will collapse. 

Collapsing bridges wasn’t what anyone had in mind when they wrote these laws. They doubtless thought that workers deserved a little more job protection. They may also have wanted to mirror labor policies from across the pond. However good their intentions, their economics are bad. These laws only increase unemployment and harm workers as a group. They should be given the policy equivalent of a red card.