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LIFE-CYCLE JUSTICE: ACCOMMODATING JUST CAUSE AND EMPLOYMENT  AT WILL

 

NAME: Stewart J. Schwab *

BIO:

* Professor of Law, Cornell University. B.A. 1975, Swarthmore College; J.D. 1980, Ph.D. (Economics) 1981,

University of Michigan. - Ed. For wonderful discussions and comments I thank Greg Alexander, Lynn Baker,

Chris Bruce, Jim Brudney, John Donohue, Ron Ehrenberg, Bob Hillman, Bob Hutchens, Susan Koniak, Saul

Levmore, Tom Rowe, Theodore St. Antoine, Bob Scott, John Siliciano, Kathy Stone, Steve Thel, Steve Willborn

and workshop participants at the University of Virginia Law School Faculty Workshop, the Labor Economics

Workshop at Cornell University's Industrial and Labor Relations School, and the annual meetings of the Amercian

Law and Economics Association and the Canadian Law and Economics Association. I thank Mike Holden for his

fine research assistance.

 

 

SUMMARY:

... "You're fired!" Most American workers hearing these words have no legal recourse under traditional employment law.

... A career--employment relationship faces two types of opportunism: opportunistic firings by an unfettered employer

and shirking by employees with job security. ... Inside productivity is above outside productivity at all stages, even before

much training, to emphasize the efficiency--wage story that harder work results in greater productivity throughout. ...

Such a firing clearly violates the good--faith notion that an employer must give the employee the benefit of the bargained--

for pension. ... In Bay v. Times Mirror Magazines, Inc., a fifty--four--year--old publisher who made nearly $200,000 per

year brought an ADEA claim after being fired from his position at Field and Stream. ... Unless the parties have clearly

agreed to at--will dismissals throughout the life cycle, such a firing smacks of an employer opportunistically firing an

employee who has committed the best years of his life and should reap, based on the norms of seniority, the benefits of

a career commitment to the employer. ... Under either approach, then, a life--cycle default rule is optimal. ... The life--

cycle framework that courts have developed provides the parties in a career employment relationship a legal structure that

checks opportunistic behavior. ...

 

 

TEXT:

[*8]

"You're fired!" Most American workers hearing these words have no legal recourse under traditional employment

law. Unless they have specific protection in a contract - and few nonunion workers do - or evidence that the firing violates

a specific antidiscrimination statute, workers are treated at will. Under this traditional view, an employer can fire them for

a good reason, a bad reason, or no reason at all. n1

 

Yet, as any employer who has recently tried to fire a worker will complain, the traditional doctrine is now full of

holes. In the past decade or two, courts increasingly have become receptive to worker claims of unjust dismissal. Still,

the protections remain patchwork and the trend uneven. No state court has proclaimed a general right of employees

against arbitrary dismissal, although the Montana court has come close. n2 Indeed, the Supreme Courts of California

and Michigan, long considered to be among the leading innovators in this area, have recently issued major decisions

signaling hesitation with ever--expanding protections for employees. n3 On the legislative side, only [*9] Montana,

reacting to its extreme court decisions, n4 has a statute requiring employers to have good cause before firing a worker.

n5 However, the Commissioners on Uniform State Laws have recently passed a Model Employment Termination Act that

would finally abolish the at--will doctrine for most employees, n6 and we can expect further debate over employment at

will as legislatures confront the model act.

 

Snapshot examinations of current unjust dismissal law have led employment law commentators to see only chaos, a set

of cases with little internal coherence or rationale. A view of the decisions in their historical sweep causes commentators

to see evolution: in the beginning was employment at will, n7 now chaos exists, the natural ending point will be

just cause. Most commentators applaud the trend, urge its completion, and bemoan any hesitation or backsliding by the

courts. n8 Their continual refrain is that the United States lags behind [*10] the rest of the world on this issue. n9 At

the other extreme, some conservatives, most prominently Richard Epstein, hearken back to the heyday of employment at

will as the ideal state of employment law. n10 Such observers lament every move away from a strict presumption that all

employment contracts can be terminated at will by either party.

 

The fundamental problem with these perspectives is that they criticize current law but they do not understand or

explain it, except in the crudest way. The just--cause boosters simply applaud every pro--employee decision and decry the

others as backsliding responses to conservative political pressures. The at--will zealots simply cheer and boo the other

way. Neither perspective appreciates the apparent vacillation of current courts, which erode the at--will presumption

without rejecting it.

 

Current termination law does have an underlying coherence. We should recognize this coherence before we reject

the contemporary common law system for either the Model Act's futuristic scheme of arbitrating just cause or a return

to the heyday of employment at will. This paper attempts to articulate the coherence of current doctrine. Reacting to

the almost uniform polarization on this issue, I argue both positively and normatively for an intermediate position. The

current intermediate position of the common law balances two conflicting problems. A career--employment relationship

faces two types of opportunism: opportunistic firings by an unfettered employer and shirking by employees with job

security. An extreme legal rule can handle either problem alone, but only by ignoring the other. Thus, a legal presumption

of employment at will handles the shirking problem well but gives no protection against opportunistic firings. A just--

cause regime has the opposite virtue and flaw. The legal challenge is to find an intermediate rule that provides the optimal

check against both dangers.

 

The common law has groped towards such a rule by recognizing [*11] that the relative magnitudes of the two

problems vary over the life cycle of the worker. The danger of employer opportunism is greatest for late--career workers,

and it is also a problem for some beginning--career employees. By contrast, the greater problem at midcareer is shirking.

In response, the courts have begun to offer contract protections for workers at the beginning and end of the life cycle,

while maintaining a presumption of at--will employment for midcareer employees. In arguing for the wisdom of this

approach, I, like the courts, refrain from making a categorical statement that at--will or just--cause employment should

never - or should always - be the governing presumption.

 

Let me sketch at the outset the boundaries of my inquiry. Using an internal--labor--markets model of career

employment, this paper examines whether courts should presume, in the absence of any express contractual provision

about job security, that an employee is at will or protected by just cause. This paper therefore skirts the fascinating contract

issues involved in employee handbooks and other arguably express agreements about the standard of discharge. Nor will

it evaluate the appropriate scope of tort limitations on employment at will. n11 The goal of this article is to articulate

a coherent framework for understanding the default rules for employment termination. While most observers see chaos

here, I find a certain logic in the leading cases. The courts have been boldest when job protection is most appropriate, and

they have hesitated precisely when at will plays its most useful role.

 

An initial caveat about methodology is appropriate. When applying the model to the case law, I will not survey

every termination case, or even most or many of the thousands of cases. Rather, my method is to use "leading" cases -

those that may indicate trends in the law - and argue how these leading cases might fit together in a coherent structure.

Leading cases rarely typify the mass of cases, and counterexamples certainly exist. Leading cases are worth studying,

however, particularly in a rapidly evolving subject area, because they often give greater hints about the appropriate

normative structure of law than [*12] would an exhaustive study of the hidebound mass of cases. Nevertheless, because

of its reliance on leading cases, my inquiry must blend positive and normative analysis. Perhaps the question addressed

here should be phrased as whether the leading employment--termination cases can fit into a coherent structure that has

normative appeal.

 

One final caveat before we begin. One could argue that we should scrap common law litigation over employment

terminations as not worth the cost of litigation. n12 Whatever rationality the current common law lines might draw, the

argument goes, its advantages are swamped by the costs of deciding on what side of the line a particular employee falls. To

my mind, this litigation--cost argument is the strongest argument for taking a polar position. By itself, however, it does not

point clearly toward either pole. Supporters of a rigid at--will presumption emphasize that fewer employees will challenge

terminations under their standard - thus saving on litigation costs. n13 At the other pole, proponents of just cause,

worried about the feasibility of courts reviewing every dismissal, typically link their proposals to arbitration rather than

litigation as the method of enforcement. n14 In any event, courts themselves are poor judges of the metadecision about

whether to have common law enforcement of employment terms. Reacting to the cases they see, courts have attempted to

create a coherent doctrine. Before rejecting their efforts on grounds of cost, one should appreciate the balance they are

trying to achieve. Until now, no one has attempted to find the method behind the current madness. While the intermediate

solution of the current common law inevitably will have detractors on both sides, much can be said on its behalf. The goal

of this article is to present that defense.

 

I. Employment as a Relational Contract

 

Workers have many types of jobs and many types of relationships with employers. Younger workers typically try

several jobs before beginning a long--term attachment to one employer. n15 This variety of [*13] relationships may

in itself counsel against a uniform legal approach to employment terminations. I will return to this issue at the end of

this article, n16 but most of my analysis will concentrate on the career employee. Termination of the career employee

provides the fact pattern for many leading cases in the erosion of employment at will.

 

A. The Specific Human--Capital Story

 

The key feature of the career employment relationship is that both sides are locked into it. The easiest explanation

for lock--in comes from a human--capital story that emphasizes "asset specificity." n17 Under the basic human--capital

model, workers become more productive as they learn the ways of the firm. Because the gains exceed the costs of training,

these firm--specific skills are worth learning. In contrast to general skills, however, these skills are not useful to other

firms. n18

 

The issue becomes whether the employer and employee can decide how to share the costs and benefits so that this

desirable training will occur. This issue can be resolved in a number of ways. One possibility is for the employer to pay

for the firm--specific training and to receive the benefits of the greater productivity by paying the worker throughout his

work life a wage equal to the wage he could get outside the firm. The problem is that the worker has no incentive to stay

with the firm because he earns no more than he could get elsewhere, and so the employer risks losing the employee before

it can recoup its training [*14] investment. Another possible resolution is for the worker to pay for the training, perhaps

by accepting a lower wage during the training period, and for the employer to pay the worker a higher wage once trained.

The mirror image of the earlier problem occurs in this situation: the firm has an incentive to underpay the worker once he

is trained, and the worker has no recourse - because the training is worthless elsewhere - as long as he is paid at least the

outside wage.

 

The best solution is for the employer and worker to share both the costs and benefits of firm--specific training. Figure

1 gives a stylizedFIGURE 1view of the situation. The outside wage is constant, equaling productivity based on general

skills. n19 In the training period at the firm, the worker accepts less than the outside wage, thereby paying for some of

the training, but the employer pays him more than his productivity during the training period, thereby paying for some

of the training. After training, the worker receives more than the outside wage, thereby reaping some of the benefits of

training, but the employer does not pay the worker for his full productivity, thereby allowing the employer to reap some of

the benefits of training. The worker will agree to this arrangement if the higher post--training wages, when appropriately

discounted, are at least as large as the lower training wages - [*15] that is, if A' is at least as large as A. The employer

will agree as long as the gains to it (B') are at least as large as its training costs (B). n20

 

In practice, these higher post--training wages take the form of seniority--based wages and late--vesting pensions,

which induce workers to stay with the firm after training. n21 Compared with the life cycle of otherwise similar

workers, the model predicts that workers who receive substantial on--the--job training will receive higher pay in later

years. Considerable empirical evidence supports this steep age--earnings profile of career employees and its relationship

to training early in the career. n22

 

A critical part of this simple human--capital story is the self--enforcing feature of the relationship. Because the parties

share the costs and benefits of training throughout the employee's work life, both parties want to continue the relationship.

The employer pays employees less than their full value later in their career. This protects employees from discharge

because a discharge would harm the employer as well. The late--career wage exceeds, however, the outside wage the

employee could receive, thereby discouraging the employee from quitting.

 

B. The Efficiency--Wage Story and the Potential for Opportunism

 

Gary Becker's human--capital theory n23 explained why wages rise with seniority, but puzzles arose that caused

commentators to question the theory that workers would receive less than their value late in their career. n24 One such

puzzle was mandatory retirement, which covered some thirty--five percent of the workforce before it was prohibited in

1986 by amendments to the Age Discrimination in Employment Act (ADEA). n25 Why would an employer, who is

paying older workers less than they are worth, demand that such workers retire? A related puzzle is the presence of

actuarially unfair pensions, which even after the 1986 ADEA amendments lawfully encourage older workers [*16] to

retire. The present value of many pensions declines if older workers keep working. n26 Again, why would an employer

establish pension plans that encourage retirement if, as the human--capital model suggests, the employer makes money

on older workers? A final puzzle stems from studies that suggest that workers' pay relative to others in their job grade

increases with seniority but their relative productivity does not. n27 This evidence conflicts with Becker's hypothesis that

productivity increases faster than wages. These puzzles suggest that employers want to end the relationship with late--

career workers at some point, probably because employers perceive their wages as exceeding current productivity.

 

To explain the puzzles, economists have developed an efficiency--wage model. n28 The basic insight behind

efficiency--wage models is that workers often work harder when the job pays more. n29 High "efficiency wages" n30

increase worker effort by making the job more valuable to the worker. Because workers want to keep the valuable

job, they will work hard to avoid being dismissed. In effect, high wages increase the penalty for being dismissed - a

dismissed worker forgoes the large payout. Because workers labor harder than otherwise, the firm can afford the higher

compensation. An early version of the [*17] model n31 assumed that a firm employing this strategy n32 raised wages

by a constant amount throughout a worker's life cycle. One problem with the early, flat--wage version of the model is that

workers nearing retirement would care less about losing their high--wage job and would therefore be less deterred from

shirking. n33

 

Later versions of efficiency--wage models suggest that compensation will rise over a worker's career to induce effort

throughout. n34 The implicit contract promises large payouts for senior workers, but it promises this reward only for

hard--working employees. n35 The firm recognizes that day--to--day monitoring of a worker's effort may be difficult, but

over a period of years the firm hopes to spot and weed out shirkers. The threat of being fired before the large payoff keeps

employees working hard. Because employees work harder than otherwise, the firm can afford the higher compensation.

Large law firms epitomize this model.

 

A related literature emphasizes that firms may conduct internal tournaments to induce high effort by junior and

midlevel management employees. n36 Tournaments are especially likely when firms cannot monitor actual effort or

output but can evaluate relative performance. A firm may (implicitly) tell an incoming class of workers that the best worker

will win the grand prize of C.E.O. A single prize may be insufficient inducement, however, so the firm may (implicitly)

offer several runner--up prizes of cushy vice--president jobs for those who try hard but fail. This model likewise suggests

an implicit agreement whereby firms pay late--career employees more than their current productivity. [*18]

 

Figure 2 grafts the efficiency--wage story to the human--capital model. As in the human--capital story, the outside

wage is flat n37 andFIGURE 2equal to outside productivity. The inside wage may be initially lower than the outside

wage, n38 but then rises. Inside productivity rises as job--specific training occurs. Inside productivity is above outside

productivity at all stages, even before much training, to emphasize the efficiency--wage story that harder work results in

greater productivity throughout. Figure 2 adds two other wrinkles that will become important later. First, because I will

specifically address the case law of employees who change employers, Figure 2 includes a preemployment "moving"

period. In this stage, an employee quits the outside job and incurs moving expenses, thus having a negative wage. Figure

 

2 also explicitly illustrates a postretirement pension. [*19]

 

The critical point of the expanded story is that the implicit contract is not always self--enforcing. As Figure 2

illustrates, after point T, firms pay late--career employees more than they currently produce. At this point, late--career

employees become vulnerable to opportunistic firing n39 because the general self--interest check on arbitrary firings

does not exist; firing such a worker does not hurt the employer but is instead in its immediate economic interest. One

can see a role for law in improving this situation. By policing against opportunism, the law can make the employment

relationship more secure for and valuable to both sides. To understand fully the role law can play, we must examine the

concept of opportunism more closely.

 

C. Contracting Problems in Career Employment

 

One solution to the problem of opportunism is for the parties entering into career employment to negotiate detailed

contracts, enforceable by courts, that specify appropriate behavior by both sides. Unfortunately, three contracting

challenges make detailed contracts an unsatisfactory solution. First, the parties cannot easily anticipate the future

contingencies, or states of the world, that will influence the relationship. n40 Will demand for the product stay strong?

Will the firm shift its focus from the employee's specialty to other areas that require more general skills? While all

predictions of the future are difficult, anticipating events twenty or thirty years in advance is an exceptional challenge for

employers and employees.

 

Second, even if parties can anticipate a future event, they may have difficulty specifying in detail the appropriate

contractual response, n41 particularly when one party has access to relevant information that the other cannot easily

observe. n42 A key element in the employment relationship is whether the employee is working hard, or, from the em

[*20] ployee's perspective, whether the employer is dismissing him for failure to work hard or for an unfair, opportunistic

reason. When monitoring is difficult, two alternatives emerge. First, the parties may decide not to make any part of the

contract contingent on difficult--to--monitor behavior. An at--will clause would accomplish this goal by making worker

efforts irrelevant to the permissibility of discharge. Alternatively, the parties may write a vague "best efforts" or "good

faith" clause for the contingency. n43 While this solution invites later court or arbitrator supervision over the meaning of

the terms, that supervision may be preferable to contractual language that straitjackets parties' future options.

 

Finally, having anticipated a future problem and specified the contractual response, a party may be unable to prove a

breach in court. Economists term this problem an unverifiable contract. n44 Unverifiability is particularly problematic

when the contractual language is vague - as it will often be in relational contracts. Both employer and employee might

know that the employee is not working as hard as "best efforts" require, but the employer cannot assemble sufficient

objective evidence to convince a court or arbitrator of this fact. If the parties cannot turn to outside enforcement, they

must develop self--enforcing mechanisms for any agreement to be effective. But, as we have seen, career--employment

contracts - particularly those following the efficiency--wage model - are not fully self--enforcing. n45

 

D. Potential for Opportunism

 

In the absence of enforceable, detailed contracts that regulate behavior, parties to a long--term relationship become

vulnerable to opportunism. They cannot easily leave the relationship because they would have to repeat the investments

or forgo their value. n46 The existence of "sunk costs" for one party creates a potential for opportunistic behavior by the

other side. A firm can pay workers less than they are worth or treat them more harshly than the initial agreement contem

[*21] plated, knowing they cannot easily move. The employees can produce less than their skills allow, knowing the

employer cannot easily replace them.

 

The law can sometimes help monitor opportunistic behavior, thereby increasing the parties' overall gains from the

relationship. If the law can enforce promises not to exploit the other side's vulnerability, the parties can more confidently

invest and the relationship will be more rewarding to both sides. The law has limits, however, because the contractual

language often will be general and vague, as we have seen. n47 More importantly, because both employer and employee

are investing, both can be exploited. A legal rule favoring one side would leave much opportunism by the other unchecked.

To curb opportunism adequately, courts must engage in difficult, case--by--case assessments or create more flexible

presumptions. As we will see, courts have responded by adopting presumptions that vary with an employee's life cycle.

 

1. Employer Vulnerability to Shirking

 

As the human--capital model indicates, employers make heavy investments in recruiting and training workers. n48

To ensure an adequate return on their investment, employers want workers to stay and produce for them after training.

Some scholars focus on employer recruitment and training costs in emphasizing employer vulnerability to employees

quitting, but this is not the trueproblem of opportunism. The basic human--capital model suggests that employers can

adopt delayed--payment schemes to discourage quitting, thus making the contract self--enforcing. Late--vesting pensions

and seniority--based wages can tell workers: "If you stick around, you will do well."

 

The greater risk to employers comes from employee shirking. The efficiency--wage model highlights the shirking

problem. Even if pensions and seniority wages discourage workers from quitting, an employer still faces problems when

workers stay. Workers often do not work as hard as they would under a fully specified and monitored contract. Economists

label this behavior shirking. n49 A fully specified op [*22] timal contract would designate an optimal level of effort.

Workers would agree to exert this effort because they prefer the higher wages that accompany it to an easier work life;

the employer would agree because the greater productivity is worth the higher wages. Once hired, however, an employee

may shirk from this optimal effort if employers have difficulty monitoring or replacing workers. Indeed, it is irrational for

workers to work up to "optimal" levels if they prefer coasting a little. Workers know that the employer will have to spend

money to catch shirkers and that, if it fires a shirker, the employer will have to recruit and train a replacement. As long as

workers perform better than a rookie would - considering the costs of monitoring, recruiting, and training - the firm must

accept less than optimal efforts from its workers.

 

Much of the debate over at--will employment addresses whether parties can write effective contracts to overcome

the shirking problem. To put it bluntly, the real question is whether the threat of firing for cause is sufficient to deter

substandard performance by workers. Proponents of at will emphasize the unverifiability of the performance standard in

many employment contracts. The employer may know the worker is shirking but cannot convince a court or arbitrator

that the conduct amounts to shirking. Oliver Williamson has emphasized the difficulty in distinguishing a consummate

performance from a perfunctory performance: "Consummate cooperation is an affirmative job attitude whereby gaps are

filled, initiative is taken, and judgment is exercised in an instrumental way. Perfunctory cooperation involves working to

rules and in other respects performing in a minimally acceptable way." n50 One problem employers have in documenting

a "perfunctory performance" is that particular instances of misconduct often seem trivial. Concluding that they add up

to a significant problem requires acknowledging that the whole problem exceeds the sum of the parts. The heart of the

employment-at-will argument is that proving cause under what is essentially an unverifiable agreement against shirking

places too great a burden on employers, preventing them from effectively using efficiency wages to deter shirking.

 

Some may argue that commentators overstate this shirking problem because the employee's desire for a good

reputation deters shirking. Even if shirking is possible in a just--cause world, this counterargument runs, benefits accrue

to employees with a reputation for hard work. Not only may the incumbent employer reward hard work with promotions

and pay raises, but employees with good repu [*23] tations are most attractive to outside employers. Nevertheless, this

reputation argument, in both its inside and outside reputation forms, ignores several important facts. First, an individual

worker with a good inside reputation may not reap major rewards. As we saw, employers often establish pay and promotion

ladders that do not depend on current individual productivity in order to discourage quits with promises of big paydays

in the future. n51 In such internal labor markets, pay scales attach to jobs rather than workers, and seniority rather

than merit often determines who gets the jobs. n52 Promoting individual workers simply because of individual hard

work may not be worth the disruptions in the general progression system. In these internal labor markets, then, unusually

good effort may not be rewarded even though unusually bad effort is punished by firing. n53 Second, an employee

may find it hard to acquire a good outside reputation if his skills are firm--specific. An academic whose publications are

useful to many potential employers can obtain an outside reputation. Indeed, some might argue that the major inside job

of the academic is to acquire an outside reputation. An engineer working on a classified defense project finds it more

difficult - and therefore has less incentive - to obtain an outside reputation for hard work. The reluctance of employers to

give candid references, itself a response to defamation law, exacerbates the difficulty for employees seeking to establish

outside reputations.

 

A second response to the shirking argument involves a quick comparative law lesson. In the rest of the industrialized

world, at--will employment is unknown, n54 yet workers manage to work hard without the threat of firing. n55 As Jack

Beermann and Joseph Singer lament, why [*24] does our society assume it can trust employers not to abuse the power

of arbitrary firings while it refuses to trust employees protected by just cause? n56 Of course, one can overdramatize the

comparative lesson. Industrial tribunals in Europe, having found a dismissal to be unjust, usually award modest severance

pay that rarely exceeds six months duration. n57 Further, commentators of "Eurosclerosis" would caution against using

Europe as a model for productive labor markets. n58

 

Ultimately, the verifiability problem involves a question of degree, and the problem is greater for some jobs than

for others. To the degree that clear contracts against shirking are difficult to write, monitor, and enforce, opportunistic

behavior by employees will remain a threat.

 

2. Employee Vulnerability

 

As both the human--capital and efficiency--wage models emphasize, employees invest heavily as they pursue a career

with a single employer. First, they obtain training that is more useful for their own employer than it would be elsewhere -

what economists term job--specific human capital. n59 Second, they join the company's career path. This path, as we

have seen, ties pay, promotions, and benefits to sen [*25] iority and generally forbids lateral entry. n60 A major cost

of pursuing a career with one firm is that one forgoes other ladders and must start over at the bottom if one leaves the

firm. Additionally, as they plan for a lifetime with an employer, workers put down roots, establish networks of friends

in the workplace and the community, buy homes within commuting distance of the job, and build emotional ties to the

community.

 

Losing these investments, roots, and ties can be devastating. Many studies document how even impersonal plant

closings lead to increases in "cardiovascular deaths, suicides, mental breakdowns, alcoholism, ulcers, diabetes, spouse

and child abuse, impaired social relationships, and various other diseases and abnormal conditions." n61 Being singled

out and fired may be even more devastating. n62

 

Because of these tremendous costs, no employee wants to lose his job involuntarily. Further, these investments, roots,

and ties are sunk costs that trap the worker in his current firm, inhibiting him from departing voluntarily. Even if the

career does not proceed as anticipated, the employee is reluctant to quit because the job remains preferable to alternative

jobs. Such trapped workers are vulnerable to opportunism. The employer might pay them less than the implicit contract

requires or work them harder, knowing they cannot easily quit.

 

By itself, this potential for opportunism does not justify a just--cause standard. Employers want such exploited

workers to stay, not to leave. Only when conditions become so intolerable that the employee prefers to quit for another

job might termination law come into play. In the economist's framework, this situation occurs when the employer has

appropriated all the gains from the relationship, making the career no longer better than alternative jobs. Lawyers label

these intolerable conditions a constructive discharge.

 

Defenders of at will contend that employer self--interest protects productive employees from discharge. n63 An

employer hurts itself by arbitrarily terminating a productive worker or by causing him to quit [*26] because it wastes the

recruiting and training investment in the employee. To avoid its own sunk--cost losses, an employer wants to keep good

workers and fire only workers who fall below the standard of new entrants. Figure 1 illustrates this self--enforcing feature.

After the training period, workers' productivity exceeds their wages, and the employer would lose this gain by firing such

workers. n64

 

While employers can make mistakes, the self--enforcing feature should minimize firing of productive workers.

Employees do not need the grand and expensive apparatus of the law for further protection, claim at will's defenders.

Indeed, its very expense harms employees as well as employers, for wages will inevitably fall as terminations become

more expensive.

 

Opponents of at--will employment remain skeptical. A major concern is that an employer is not a monolith but rather

a hierarchy of high--level managers and low--level supervisors. Often low--level supervisors make the decision to fire, and

the factors influencing their decisions are often not perfectly aligned with the profit--maximizing interest of shareholders.

Thus, while shareholders may not want employees to be fired arbitrarily, supervisors might. Personality conflicts and

power trips may lead supervisors to fire valuable and productive employees.

 

Again, one can overstate the dangers of front--line supervisors running amok. The firm has incentives voluntarily to

reduce supervisor mistakes so long as the gains in employee satisfaction outweigh the costs of supervising the supervisors.

Just--cause advocates cannot make their point simply by showing that agency costs exist. They must show further that

employers will not take cost--effective steps to ensure that they treat their employees fairly.

 

One check on such opportunism - emphasized in the efficiency--wage literature - is the employer's concern for

its reputation. If word gets out that an employer routinely fires older workers, it will be harder for the employer to

recruit entrants into career jobs. Perhaps more damaging than its outside reputation is its inside reputation with fellow

employees when older, productive workers are fired. n65 This loss of collegiality may encourage other workers to quit.

Problematically [*27] for the employer, the most productive workers likely have the greatest opportunities for moving

elsewhere.

 

In many situations, reputation is unlikely to check fully the employer's incentive to fire late--career workers. Young

job entrants cannot easily assess an employer's reputation for how it handles senior workers. n66 Great problems arise

in passing on knowledge of a firm's opportunistic firings between generations of workers. n67 These problems are

particularly acute in small or new firms, n68 where much of the workforce works. n69 Finally, a reputation for harsh

personnel policies may not greatly harm declining firms that are not hiring many new workers. n70

 

Because reputation is not a full check on opportunism, firms must compensate workers for the risk that the delayed

bonanza may not accrue. Early--career wages, or the late--career bonuses and pensions, must be higher than they would

have to be were reputations more secure. Court scrutiny of opportunistic firings may offer another method of policing

long--term contracts. Such third--party scrutiny may allow employers to offer efficiency--wage contracts at lower overall

cost. The danger, of course, is that court intervention will diminish the employer's flexibility in firing workers whose

shirking a court can [*28] not verify. The question is whether court intervention can be limited to opportunistic firings,

rather than to a broader supervision against unfair firings in general.

 

II. An (Inconclusive) Appeal to Empiricism

 

We see, then, that both the employer and employee are vulnerable to opportunism. Which is the greater problem -

shirking or unjust firings? Or, more precisely, what legal rule can best reduce the problems? The choice is highly

political. Those sympathetic to workers will feel their exploitation is the greater problem and favor just--cause. Others

who instinctively rely on private markets may see a greater need to curb worker shirking and so favor at will.

Some scholars have looked at actual practices to help resolve the debate. n71 It is useful to sketch these appeals to

empiricism before rejecting them as inconclusive and moving to the life--cycle theory of career employment.

 

A. The Pervasiveness of At--Will Employment

 

Certainly, at--will employment is the legal norm for the vast majority of American workers. As a long--repeated

practice by many players negotiating many contracts, at--will employment is a plausible candidate for being the optimal

arrangement, in the sense that the overall gains, which primarily accrue to the employer, outweigh the costs of potentially

arbitrary firings, which are borne primarily by employees. Both sides can share this net gain by increasing the wage to

compensate workers for the risk of firing. Richard Epstein uses this empirical observation to bolster his argument for the

desirability of at--will employment: "The survival of the contract at will, and the frequency of its use in private markets,

might well be taken as a sign of its suitability for employment relations." n72

The empirical claim that most private employees are at will is rarely disputed. n73 One needs some faith in the

efficiency of labor markets, however, to infer that this proves that at--will employment is effi [*29] cient, in the sense

that the costs to employers from a switch to just cause would outweigh the gains to workers. Unequal--bargaining--power

theorists are unlikely to have such faith.

 

The noted institutional economist John Commons put it well long ago in disputing the claim that the employer and

the at--will employee have equal freedom to quit the relationship:

If the corporation has 10,000 employees it loses only one ten thousandth part of its working force if it chooses to not--

employ the man, and cannot find an alternative man. But the man loses 100 per cent of his job if he chooses to not--work

and cannot find an alternative employer. n74

 

Commons's observation envisions an employer with market power, perhaps a monopsonist or even a company town.

Even a monopsonist, however, would not insist on at--will employment if it harmed employees more than it helped the

monopsonist. A monopsonist can increase its profits by offering cost--effective fringe benefits because employees would

agree to work for a lower wage. n75 If employers had unlimited bargaining power, an employer would only pay workers

a subsistence wage. n76 This does not accord with the reality of the labor market for most American workers.

 

In any event, the monopsony model is inapt. Most employees today have alternative job options, n77 at least at

the beginning of a relationship, which limits the monopsony power of employers. If at will presents a serious danger

of exploitation and beginning employees see the danger, they will require higher wages before they accept the danger.

Refusing to concede that workers will receive benefits for which [*30] they are willing to pay, unequal--bargaining--power

enthusiasts shift their argument away from the existence of a monopoly to the absence of real bargaining. Even if workers

have several entry--level job options, the argument runs, workers have no real choice because every employer offers at--will

employment on a take--it--or--leave--it basis. Duncan Kennedy, hardly an unabashed enthusiast of the economics vision,

provides the best response to this argument. n78 As Kennedy realizes, one cannot test whether buyers as a class influence

compensation packages by studying whether individuals dicker over terms. n79 The analogous argument would be that

consumers have no influence over breakfast cereals because they cannot bargain with the grocery store manager over the

terms of sale. n80

 

Of course, as I have been emphasizing, both employer and employee gain more from the long--term relationship than

they would by starting over with others. This relationship surplus must be divided between them. There is no clear theory

or evidence about how the parties should divide the surplus. n81 Importantly, though, even an employer who captures

most of the surplus has an incentive to promise just--cause terminations if that is the efficient promise. The fact that we

virtually never see employers make such promises is some indication that at will is the efficient relationship, especially

when at will is supported by a plausible model of its efficiency.

 

B. The Unionized Just--Cause Standard as Counterfact

 

Rather than resort to inequality of bargaining power to refute the [*31] significance of at will's pervasiveness, a

weightier rebuttal n82 emphasizes that the just--cause standard always governs terminations among unionized workers.

n83 Free--market proponents might attempt a quick dismissal of this fact by saying that unions distort the market; one

cannot expect the unionized market to reflect efficiency. n84 But this response is too hasty.

 

The competitive market may reflect the preferences of marginal workers, but it does not necessarily reflect the wishes

of inframarginal workers. n85 In a competitive labor market, employers learn how to structure their employment package

from the ease with which they fill positions. They rely, in other words, on signals from workers they are trying to recruit,

or workers who are deciding whether to quit. If these workers do not reflect the interests of inframarginal workers, the

competitive market will not reach an efficient result.

 

The inframarginal workers - the career employees upon whom we have been focusing - are locked in. They have

made significant investments in the workplace and cannot easily leave. In a competitive market that relies on exit and

entry to register preferences, locked--in employees will not be included in the calculus. This is not a problem unless their

preferences differ in some dimension from the preferences of marginal workers less tied to the firm. It is quite plausible,

however, that the average worker has significantly greater preference for job security than does the marginal worker. The

marginal worker is typically young and in the process of trying out several jobs before [*32] finally settling on a firm

with which to establish a career. n86 This marginal worker may not recognize or value fully the firm's reputation for job security and may not realize that he may one day be locked into a career with this firm. n87


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