Dismissal Disputes and the Incentives to Bargain: Estimates of the Contract Zone

Abstract

In many countries the arbitration of dismissal disputes by public tribunals and state agencies is regarded as slow and expensive. Some common law countries, including the United States and Australia, are privatizing dispute resolution on the premise that this is more efficient than using statutory channels, and it is thus perceived as a better method of settling disputes. Previous advances in statutory law regarding the arbitration of dismissal disputes have been either rescinded or circumvented, sometimes with dramatic political consequences. Little is known, however, about the extent to which statutory law induces inefficiency and redistribution. The author uses settlement and arbitration cost information derived from both Australian courts and survey research for the period 2001-2008 to estimate the contract zone of average settlements, that is, the legal, stigmatic and uncertainty costs saved by averting arbitration. He finds that dispute resolution under statutory law is not as wasteful as it initially seems, nor are substantial resources redistributed from business owners to labor suppliers. particularly indebted to Robert Breunig for expert advice on the sensitivity analysis section.Various data appendices with arbitration cases, award distributions, GAUSS procedures, basic computations and simulation results are available upon request by

The impact of unfair dismissal regulation: Evidence from an Australian natural experiment

“…The relative measure (i.e. % of annual wage cost) is analytically more useful and was previously used to calibrate the firing cost elasticity of employment (Freyens and Oslington, 2007) and to estimate the contract zone in settlement negotiations (Freyens, 2011). To obtain the relative measure, we recorded all relevant background information we could such as the occupation of the dismissed employee, the Australian State, the sector of activity and the size of the employer, and then applied ABS weekly earnings categorized by State, sectors and occupation (ABS, 2010), which we adjusted for each relevant year using the time series of average weekly earnings (ABS, 2011).…”

The economics of employment tribunals

“…Such an analysis goes to the heart of the tension between efficiency and fairness that policymakers must resolve. A study using Australian cross-sectional data reports the average monetary size of the contract zone to be approximately 16% of the average annual wage cost, with employers saving around 11.5% of that cost (slightly more than half the cost of proceeding to adjudication instead), and employees obtaining around 8% (cost savings of 4.2% plus their threat point or fallback position; that is, the outcome they expect to obtain in the absence of a negotiated settlement) [8]. On that basis, estimated costs are modest, a finding confirmed in later work drawing on survey data to estimate firing costs directly.…”