The Free Market 19, no. 3 (March 2001)
Due to the weakening economy, the red-hot job market appears to be at an end. Employers are already handing out pink slips, giving rise to complaints about the “injustices” of the market system, particularly among younger workers whose careers have been furthered by an unusually long economic boom.
Few recognize that being hired, fired, and rehired is a natural market process that can gradually lead them to the job that is best suited to their particular talents. Fewer still will understand that government intervention into the hiring and firing process is likely to make employers and workers worse off.
It is difficult not to be resentful after being fired, but a worker who wishes to be more attractive to future employers will take each dismissal as an opportunity to learn. The famous free-market economist Henry Hazlitt remarked about when he first started out to get a job, “I remember I had no skills whatsoever. So I would get a job, and I would last two or three days and be fired. It never surprised me or upset me, because I read the [New York] Times early in the morning, went through the ads, and I’d practically have a job that day.” Each time he was fired, Hazlitt learned something new, until he finally attained the job at the Wall Street Journal that propelled him into a stellar career as a writer on economic issues.
An employer who has the complete freedom to hire and fire can put just the right person in the right job, boosting productivity and profits, and helping lower prices. If this crucial trial and error process is restricted in any way, employers find themselves stuck with unproductive employees, and workers are not encouraged to take jobs that make the most of their abilities.
Contrary to the beliefs of many union advocates, preserving free-market principles in labor markets protects employees and puts more people to work. Mises states it best when he says that in the market economy, “the employer is not the employee’s lord. He is simply the buyer of services which he must purchase at their market price.” Like every other buyer, an employer has discretion. But too much arbitrariness in hiring jeopardizes profitability. This incentive system protects the worker from systematic abuse.
Furthermore, a firm that has complete freedom to fire faces much lower risks when taking on new employees. Employers are much more willing to take chances with young, inexperienced workers if they know there’s a low-cost way out. This gives marginal workers an opportunity to prove themselves and boosts employment in the whole economy. If employment opportunities are to grow and the expansion of the economy is to be sustained, lawmakers and courts must preserve the employer’s freedom to fire.
An employer’s absolute freedom to hire and fire is a critical element in a growing, active economy. But politicians, bureaucrats, and judges have collaborated to annihilate this freedom through misguided antidiscrimination regulations and lawsuits.
Sexual harassment or racial discrimination claims, often groundless or frivolous, can turn into costly debacles for employers when faced with an unfavorable court ruling. Even a successful defense can be ruinous. Because the average cost of defending a discrimination lawsuit is so high ($60,000), employers will often settle out of court. Thus, any employee who happens to fit into a legally recognized “disadvantaged” group is effectively given legal permission to extort settlement money from his or her employer.
While an employer runs incredible risks to remove even the most incompetent person from his payroll, employees and customers can “fire” with impunity. Any job is by nature a two-sided deal. If the employee is at any time dissatisfied with the work environment or the pay, he is free to renegotiate with his boss or to “fire” him by quitting. Similarly, customers regularly “fire” merchants by discontinuing business with them and replacing them with others who better satisfy their needs.
If customers could be threatened with a lawsuit for discriminating against a former grocer, we would call that absurd. If employees could be compelled to continue work under threat of legal action, we might even call that slavery. But employers, who are misconstrued as powerful masters of endless financial resources, are forced to shell out to anyone who claims victimhood.
Returning the absolute right to fire to employers would increase wages and profits for almost everyone (though unscrupulous trial lawyers and bureaucrats might see gloomier days). In the current litigious environment, every employer has to self-insure against the possibility that each new hire will turn into an unfirable incompetent.
By hanging the threat of a lawsuit over his boss’s head, an employee might achieve greater job security, but this security isn’t free. Because the employer must set aside a certain amount for legal defense, employee wages and company profits will both be lower. In fact, increased legal expenses may so reduce the company’s profits that the firm is forced to lay off workers en masse or even shut down, leaving the worker unemployed.
Recovering the freedom to fire can help fit the right workers to the right jobs, give new opportunities to inexperienced workers, and boost employment, wages, and profits. But reclaiming that essential freedom is not as easy as passing a new law or revoking old laws (though legislative changes need to be a part of the solution). Because much of the problem arises in thousands of bad court decisions every year, the solution must begin in the courts.
Courageous juries aware of the doctrine of jury nullification can set aside decades of poor legal precedent to return hiring and firing power to employers. Judges refusing to condone employer harassment can toss frivolous discrimination cases out of their courtrooms. Finally, when the courtrooms are no longer places of extortion, the bureaucrats and politicians who promote all kinds of employer harassment should be given an opportunity to find more productive employment.
Timothy D. Terrell is assistant professor of economics at Wofford College and an adjunct scholar of the Mises Institute (terrelltd@wofford.edu). Further Reading: Ludwig von Mises, Human Action, Scholar’ s Edition (Auburn, Ala.:Mises Institute, 1998), pp. 308 11, 629.
