This month, in the midst of World Cup fever, New York City enacted a new job protection law. The law prohibits app-based ride-hailing platforms from firing drivers unless they can prove they have “just cause” or “justifiable economic reasons.” The new law follows the pattern set by a similar pandemic-era New York City law, applying the same standards to the fast food industry.
As an example of a political slogan, these laws are difficult to defeat. No one disputes the fairness of the shooting. However, as an economic policy, it is nothing but an own goal. By making it harder to fire employees, you inadvertently discourage companies from hiring them in the first place. It will also be difficult for people who are already employed to change jobs. The result will only be bad economic conditions, such as reduced market vitality, poor job matching, and increased unemployment. Perhaps all they can say is that in this season of international sporting competition, they are making the city look more European, but it’s not what anyone expected.
Unwanted import
Historically, the United States has rarely enacted employment protection laws. The default rule is “employment at will,” meaning either the employer or the employee can terminate the relationship at any time for any reason. Admittedly, this principle has its limits. Anti-discrimination laws, whistleblower protections, and some common law rules prohibit termination for certain reasons. But in general, at-will employment is a pervasive and enduring feature of American labor law.
This default rule, in turn, has helped keep America’s labor market dynamic. Labor market dynamism is essentially a measure of how easily workers move in and out of jobs. A market is considered dynamic if workers can move between jobs with low friction. And high dynamism is a sign of a healthy market, meaning that labor supply can flow to the most productive sectors.
But employment protection laws push the market in the opposite direction. It affects one aspect of labor flows by intentionally making it harder for people to move out of their jobs. But, less intentionally, they also have an effect on the other side of the tide, reducing the number of workers that employers hire. The reason is simple. If employers know it’s hard to fire people, they’ll be more selective about who they hire in the first place. And in the long run, employers will hire fewer people overall.
This effect can be measured by comparing the US labor market with the European labor market. While the United States has few restrictions, European countries often have strong employment protection laws. And these laws tend to increase unemployment. A particularly serious case is France. Since 1956, France has adopted a series of employment protection laws, ranging from advance notice requirements to severance pay obligations. And over the next 30 years, unemployment skyrocketed from 1% to 10%. Economists attribute much of the increase to the country’s legal discharge limits. The loss of labor market dynamism had real costs.
A city that never burns
These data did not deter New York City. In 2021, the city enacted the nation’s first “just cause” law. The law targets the fast food industry and prohibits employers from firing employees without “just cause” or “justifiable economic reasons.” If an employer wishes to fire a worker on that basis, it must make the case through binding arbitration. And if you get things wrong, you could be liable for both unpaid wages and civil penalties.
Faced with such costs, it’s hard to blame companies for hiring fewer employees. But that concern has not yet trickled down to New York City Hall. Instead, city council members extended the cause policy to new industries. They recently passed legislation creating just-cause protections for app-based rideshare and delivery drivers. Others are calling for the good cause standard to be extended to all workers in the city. In effect, they aim to eliminate jobs at will and make cause the default rule.
the price of protection
That change is unwise. The impact on employment is clear. Over time, employment protection laws tend to reduce total employment. But less obviously, these laws can keep people in the wrong jobs. When it becomes difficult to change jobs, people tend to try to hold on to their current jobs. They do this even though their talents could be better utilized elsewhere. It means that the labor market stops flowing and the supply of labor stops flowing to its most productive uses. Markets become less efficient and everyone is worse off.
Hiring delays will be a problem in any labor market. But it’s especially bad for markets like the one New York City is targeting. Again, employment protection laws reduce employment primarily by slowing down employment. In markets where sales are low to begin with, it will take time for the effects to appear. But in high-turnover markets, it shows up even faster. The harm will be more immediate.
In that sense, few sectors are more vulnerable than fast food and app-based services. In the fast food industry, annual employee turnover can be as high as 130%. This industry employs many young and inexperienced workers, who tend to finish their jobs faster. Although hard numbers are difficult to come by in the app-based field, attrition rates appear to be high. Some estimates put it at 97% per year. In other words, statistically speaking, almost everyone in your workforce will be completely new each year.
These markets are not the only ones at risk. Today, fast food and app-based jobs are so mobile that they often act as a safety valve for workers in other sectors. Bank workers who lose their office jobs may rely on ride-sharing apps to make ends meet for several months on their own. His ride-sharing job is essentially a bridge job. Bankers can endure longer to find a new job while still making ends meet. But as markets become more rigid, opportunities become less plentiful. The bridge will collapse.
No one had bridge collapses in mind when they wrote these laws. They must have thought that workers deserved a little more job protection. They may also have wanted to reflect labor policy across the pond. No matter how good their intentions are, the economic situation is bad. These laws only increase unemployment and harm workers as a whole. They should be given the policy equivalent of a red card.
