Employment-At-Will Exceptions and Jobless Recovery

In this paper I study the effects on jobless recovery of diminishing the power of an employer to fire an employee through Employment-At-Will Exceptions (EWEs). I do so by using a dynamic panel with quarterly data ranging from 1976 to 2010 for the 50 states in the United States. I test both changes in state unemployment rates and state-weighted GDP growth in single variable regressions and VAR regressions. My contribution to the literature is threefold. First, I show two of the three EWEs contribute significantly to jobless recovery in the U.S. The statistical tests in this paper show that Implied Contract Exceptions slow decreases in the unemployment rate during recovery from recession by between 0.025 and 0.033 percentage points per quarter, and Covenant of Good Faith and Fair Dealing Exceptions do so by between 0.039 and 0.055 percentage points per quarter. Second, I lend support to the predictions of theory that increased firing costs decrease the rate of hiring during recoveries. Third, I resolve differences in the various sources documenting the three types of EWEs in different states.