Dismissal Disputes and Endogenous Sorting

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 09.04.2015, 12:15 - 13:30


Presentation by 

Gerard A. Pfann (Maastricht University)


A dismissal dispute is a difference between an employer and an employee that prevents agreement on work contract termination. Disputed employer initiated separations often lead to costly and lengthy job termination processes. Such disputes can have various forms, as emphasized by the law practice and by country specific legislation. Many relevant and important questions can be asked. How shall we model and classify disputes? How do different grounds for contract terminations sort among different types of disputes? How long and how costly are dismissal disputes? Do courts and other third party institutions respond differently to different disputes? Yet, the economics of dismissal disputes is surprisingly silent. This paper is an attempt to partly fill this gap. Theoretically, the paper proposes a simple accounting framework that is coherent with general dismissal legislation. Empirically, it has access to more than 2000 dismissal disputes that took place in the Netherlands between 2006 and 2009. The data set records dispute level information on both the employer and the employee engaged in the controversy, including firm and worker characteristics, the reason of the dispute, the process duration, the decision, and the associated costs. In addition, the paper models the trade off between a lengthy bureacratic dismissal procedure via the Public Employment Service and a costly court ruling, as typically faced by Dutch firms. The model rationalizes the sorting of disputes among the two institutions and helps understanding the longevity of the Dutch model and its political resilience. Finally, it highlights how different institutions act differently in the face of dismissal conflicts. Such a phenomenon is clearly observed in the real life data.

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