Conditioning Expectations: The Protection of the Employment Bond in German and American Law

Abstract

According to many observers, one of the critical factors accounting for the unprecedented economic growth that the United States enjoyed during the past decade is a regulatory regime that places few restrictions on an employer's ability to shed unwanted employees. Similarly, the slower economic growth that Germany and Europe experienced during this period often is attributed to elaborate employment protection schemes that restrict the ability of employers to discharge undesired workers. These protections are blamed for making countries like Germany less attractive places for foreign investment. This piece examines in comparative perspective the restrictions the American and German regulatory schemes place on an employer's ability to dissolve the employment bond. Although the two systems proceed from opposite suppositions (i.e., employment-at-will vs. discharge only for just cause), we find there is far less divergence between the two regimes than typically is assumed. Though distinctive, each system provides a set of protections against unfair dismissal which differ only in their focal points and areas of emphasis. Among other things, we find that in contrast to the United States, the German scheme permits an employer to calculate with comparative reliability the cost associated with any termination. Even though legal insurance and other institutional features makes bringing an unfair dismissal action very inexpensive in Germany, highly-compensated employees seek legal protection against terminations with significantly greater frequency than do lower-level employees. Less qualified workers also have distinctly worse prospects of success in both legal systems. In the United States, the validity of terminations typically is challenged through an employment discrimination action. Although discriminatory discharges also are prohibited by German law, the Unfair Dismissal Act has made discrimination actions substantially irrelevant in practice. We also note that the spectacular growth in job creation the United States enjoyed during the 1990s came at a time when we had more peace-time employment regulation than any period in our history. We find some evidence for the hypothesis that unfair dismissal protections do not slow employment growth, but may instead stimulate productivity.