As excitement builds around the World Cup, New York City has introduced a significant job-protection law. This legislation prohibits app-based rideshare companies from dismissing drivers without demonstrating “just cause” or a “bona fide economic reason.” This move mirrors a similar law aimed at the fast-food sector that was enacted during the pandemic.
While these laws are framed under the banner of fairness in employment practices, their economic implications can be quite damaging. By complicating the process of termination, they inadvertently dissuade businesses from hiring new employees. Moreover, existing workers find it increasingly challenging to seek new job opportunities. This ultimately leads to less market activity, poor job matching, and elevated unemployment rates. Ironically, while they may give New York a more “European” appearance during this global sports event, it’s not the kind of distinction that many might celebrate.
An Undesirable Import
Historically, job-protection laws have been uncommon in the United States. The standard practice has been “employment at will,” which allows either the employer or the employee to end the employment relationship for any reason at any time. While there are exceptions—such as anti-discrimination laws and whistleblower protections—employment at will remains a foundational aspect of American labor law.
This principle has supported a dynamic labor market. A vibrant labor market is characterized by the ease with which workers can transition between jobs. High labor market dynamism is indicative of economic health, as it signifies that workers can be utilized where they are most effective.
However, job-protection laws tend to have the opposite effect. They complicate the process of letting workers go, which can lead employers to hire more cautiously. Acknowledging the increased difficulty involved in dismissing employees can result in employers being selective, ultimately hiring fewer individuals. This trend diminishes overall workforce participation in the long run.
Research illustrates this effect when examining labor markets in the U.S. versus those in Europe. While the U.S. has relatively few restrictions, many European nations enforce stringent employment-protection regulations, leading to increased overall unemployment rates. France serves as a prime example; after implementing various job-protection measures in the mid-1950s, its unemployment rate soared from 1% to 10%. Economists largely attribute this surge to the stringent legal restrictions on dismissals, resulting in a significant loss of labor market dynamism.
The City that Never Fires
Despite this evidence, New York City remains committed to its course. In 2021, it established the nation’s first “just cause” law, focused on the fast-food industry. According to this regulation, an employer cannot terminate an employee without having “just cause” or a legitimate economic reason. If an employer wishes to dismiss a worker, they must present their case in binding arbitration, facing potential back wages and civil penalties if they do not comply.
Considering these possible repercussions, it’s understandable that businesses might reduce their workforce. Yet city lawmakers have extended this just-cause framework to cover app-based rideshare and delivery drivers. There are even discussions about applying the just-cause requirement to all workers in the city, effectively attempting to supplant employment at will with just cause as the standard practice.
The Price of Protection
This shift would be a mistake. The implications for employment are clear: over time, job-protection regulations tend to decrease overall job availability. Additionally, these laws can lead to individuals remaining in unsuitable positions. When job mobility is restricted, workers often feel compelled to stay in roles that may not align with their skills. Consequently, the labor market becomes stagnant, preventing talent from moving to more productive opportunities. This inefficiency harms everyone involved.
Slow hiring processes pose a challenge across all labor markets—but particularly in sectors targeted by New York City’s laws. Employment-protection measures primarily reduce job availability by hindering the hiring process. In industries where turnover is already low, the effects may take time to surface. However, in fast-paced sectors, the negative impacts are more immediate and pronounced.
Fast food and app-based industries are especially vulnerable. In the fast-food sector, annual employee turnover can reach as high as 130%. These industries typically employ a large number of young and inexperienced workers, who tend to change jobs frequently. Similarly, while precise data on turnover in the app-based sector may be elusive, estimates suggest it can be as high as 97% annually, indicating that nearly the entire workforce is new each year.
Moreover, fast food and app-based services are often critical safety nets for workers across various sectors. A banker displaced from their job may rely on rideshare services to bridge the gap while seeking new employment. However, if the market becomes less flexible, such transitional opportunities will diminish, posing a risk to those in need.
In creating these laws, advocates likely aimed to enhance job security for workers. However, despite good intentions, the economic consequences are detrimental. Such regulations tend to elevate unemployment rates and adversely affect the workforce as a whole. Ultimately, these laws merit strong reconsideration.
