This month, amid World Cup fever, New York City implemented a new job protection program the law. The law prohibits app-based rideshare platforms from removing drivers unless they can show they have “just cause” or “strong economic reason.” The new law follows the pattern set by a similar pandemic-era law, also from New York City, which applied similar standards to fast food industry.
As examples of political slander, these laws are hard to beat: no one will dispute the justice of the shooting. But like economic policies, they do not reach your goal. By making it difficult to fire people, they don’t mean it get discouraged businesses from hiring those people in the first place. They also make it difficult for people who are already employed to change jobs. They produce nothing but bad economics: reduced market power, worse job matching, and higher unemployment. Perhaps the best that can be said for them is that, in this season of international athletic competition, they make the city look European—not in the way one would expect.
Unwanted Imports
Historically, labor protection laws have been rare in the United States. The default rule is “job at will“—either the employer or the employee may terminate the relationship for any reason and at any time.” Of course, this system has limits: anti-discrimination laws, whistleblower protection, and so on. general rules prevent shooting for certain reasons. But generally, employment at will is a widespread and enduring feature of American labor law.
That default rule, in turn, has helped keep America’s labor markets flexible. Labor market volatility is a measure of how easily workers move into and out of jobs. If workers can move between jobs with low friction, the market is considered strong. And high intensity is a sign of the health of the market: it means that the supply of labor can go into the sectors where there is more production.
Labor protection laws, however, are depressing the market opposite direction. They affect one side of the labor flow by deliberately making it difficult to get people out of jobs. But less deliberately, they also have an effect on the other side of the flow, causing employers to hire fewer workers. The reason is simple: if an employer knows it will be difficult to fire someone, it will be more selective about who they hire in the first place. And over time, employers will hire fewer people overall.
This effect can be measured as to compare US labor markets have gone European. Although the United States has few restrictions, European countries they often have strict labor protection laws. And these laws tend to produce high unemployment rates. The most difficult case is France: After 1956, France adopted a series of labor protection laws, from advance notice requirements to mandatory severance payments. And over the next thirty years, their unemployment rate increased from 1% to 10%. Economists have done so mentioned most of which are raised above the country’s legal emission limits. The loss of labor market power has had real costs.
The City That Doesn’t Burn
This data did not discourage New York City. In 2021, the city passed the nation’s first “just cause” ordinance. It is intended fast food industrythis law prohibits an employer from firing an employee unless the employer has “reasonable cause” or “strong economic reason.” If the employer wants to remove the employee below that level, he must respond with a binding decision. And if things go wrong, they can be liable for both back wages and civil penalties.
Faced with those kinds of costs, one can hardly blame a business for hiring fewer employees. But that concern hasn’t reached New York’s city hall. On the contrary, city lawmakers have extended the policy of legal grounds to new industries. They recently passed laws that create application-based reason protections rideshare again delivery drivers. And some call to expand the level of reason just to all work in the city. Basically, they intend to end the employment at will and do the right thing default rule.
Protection Value
That change will not be ill-advised. The employment consequences will be obvious: over time, the labor protection laws will adapt reduce the work is complete. But obviously, these laws may cause people to stay in the wrong jobs. When changing jobs becomes difficult, people tend to hold on to the jobs they already have. They do so even though their skills could be better used elsewhere. That means the labor market stops being tight, and the labor supply stops being very fluid productive use. Markets don’t work well, and everyone is worse off.
Low hiring can be a problem in any job market. But it’s worse for markets like those targeted by New York City. Also, employment protection laws reduce employment mainly by reducing employment. In markets where profits are low to begin with, the effect will take time to show. But in markets with fast profits, it will appear very quickly. The damage will be very fast.
In that sense, there are few sectors more at risk than fast food and app-based services. In fast food, the annual turnover of the workers can be very high 130%. The industry employs a large number of young and inexperienced workers, and those workers are often out of work quickly. And while hard numbers are hard to come by in the app-based sector, profits seem high even there: some estimates include it 97% per year. In other words, each year, almost all employees are, statistically, brand new.
And these are not the only markets at risk. Because fast food and app-based work are so fluid today, they often act as safety valves for workers in other fields. A banker who loses his desk job may continue for several months using a rideshare app. His rideshare business is basically a the bridge: a banker can hold off for a long time to find a new job while still making a living. But if the market gets tough, the opportunities will be more. The bridge will collapse.
Bridge collapse was not what anyone had in mind when they wrote these laws. Undoubtedly they thought that the workers deserved more and more protection at work. It’s also possible that they wanted to emulate labor policies across the pond. Although their intentions are good, their economy is bad. These laws only increase unemployment and harm workers as a group. They should be given a policy equivalent to a red card.
