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The Economic Effects of Employment Law in California: The Unintended Consequences of Good Intentions
PRI Study
By: Richard Vedder, Lowell Gallaway
9.1.1995
Shortly before Californians prepared to observe the Labor Day weekend holiday, the U.S. Department of Commerce delivered the bad news that once again California workers had experienced nearly the slowest personal income growth in the nation. Personal income in California grew at a paltry 2.1 percent in 1994, the third-slowest rate of growth among all 50 states.1 At this rate, Californians are not even keeping up with the low 2.4 percent inflation rate. Moreover, this marks the fourth year in a row that personal income growth in California has badly trailed the national average, especially our neighboring states of Nevada, Arizona, and Oregon, each of which have been among the states enjoying the fastest personal income growth. Much ink has been used in recent years analyzing and describing California's woeful economic condition, but one major factor that has tended to be overlooked is employment law. Employment law, as will be explained below, is intended to protect workers from arbitrary and capricious behavior by employers, and although it no doubt serves this laudable goal in many cases, employment law today has the unintended effect of significantly diminishing job opportunities and income growth for workers in California. In 1992 the RAND Corporation's Institute for Civil Justice concluded that employment law in California diminished employment by as much as 4 to 5 percent.2 The study published here, by labor market economists Richard Vedder and Lowell Gallaway of Ohio University, examines the same issue through a labor market economic model they have developed over the last decade. This study, which is an excerpt from a forthcoming national study of this issue, not only confirms the RAND findings, but also argues that the burden of lost job opportunity and diminished potential income is not borne equally: the evidence suggests that low income groups suffer disproportionately from this employment climate. The authors estimate that wrongful termination litigation has resulted in more than 170,000 jobs lost in California since 1970, and an income loss since 1970 of more than $6 billion. But this is not the most worrisome finding of their analysis. Most of this loss in job opportunities and income is experienced by lower income individuals-the very people who are supposed to be best served by the employment law protections. This study finds that employment related lawsuits may increase overall income inequality by as much as 10%, as measured by the U.S. Census Bureau's "Gini Index." To quote the authors: "The introduction of the wrongful termination concept has had the effect of substantially increasing the degree of inequality in the distribution of income in the United States."
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