This Month’s Legislative Play: New York City’s Job Protection Law
As World Cup excitement engulfs the city, New York has rolled out a new job protection law that prohibits app-based rideshare companies from terminating drivers without demonstrating a “just cause” or offering a “bona fide economic reason.” This initiative echoes a similar pandemic-induced regulation that previously impacted the fast-food sector.
While the rhetoric surrounding these laws touts fairness in employment practices, their economic implications tell a different story. By complicating the process of employee termination, they inadvertently deter businesses from hiring in the first place. Moreover, they hinder job mobility for existing employees. The result? A less dynamic market characterized by poor job matching and elevated unemployment rates. Ironically, in this season of global sporting spectacles, New York’s labor policies are starting to resemble those of Europe—not quite the admiration they might have sought.
An Unwelcome Import
Historically, job-protection laws have been a rare breed in the United States, overshadowed by the prevailing “employment-at-will” doctrine. Under this rule, either party can terminate the employment relationship for almost any reason, anytime. This principle does have its boundaries—antidiscrimination laws, whistleblower protections, and certain common-law rules prevent firings for specific reasons. However, the employment-at-will standard has been a cornerstone of American labor law.
This flexible model has significantly contributed to the dynamism of American labor markets, defined by how fluidly workers can transition between jobs. A dynamic market allows talent to flow into sectors where it can be utilized most effectively, signaling a healthy economy.
In contrast, job-protection laws create obstacles within this labor flow. They restrict the movement of employees out of positions while simultaneously discouraging employers from hiring, as the perceived risk of a challenging termination process leads to increased selectivity during hiring. Over time, this may result in fewer job opportunities overall.
The tangible consequences of such laws can be observed when contrasting the U.S. labor market with that of European counterparts. While the U.S. maintains a relatively flexible approach, many European nations impose stringent employment protections, correlating with heightened unemployment rates. A glaring example is France, which adopted a series of job protection measures post-1956, resulting in a skyrocketing unemployment rate from 1% to 10% over three decades. Economists largely attribute this surge to stringent laws limiting dismissals, illustrating the detrimental impact on labor-market fluidity.
The City that Never Fires
Despite these insights, New York City remains undeterred. In 2021, it became the first city in the nation to enact a comprehensive “just cause” law targeting the fast-food industry, mandating that employers can only terminate employees for “just cause” or legitimate economic reasons. Should disputes arise, the employer is obliged to present its case through binding arbitration, facing potential back wages and civil penalties for incorrect terminations.
Under such circumstances, one would hardly fault businesses for adopting a more conservative approach to hiring. Yet, this reality appears lost on city lawmakers, who have recently broadened just-cause protections to include app-based rideshare and delivery drivers, with calls to extend these protections to all workers in the city. Essentially, there are movements to eliminate the employment-at-will principle, making just cause the new standard.
The Cost of Protection
Such a shift would be misguided. The employment ramifications are stark: over time, job protection laws typically diminish overall employment levels. More subtly, these regulations may force individuals to remain in unsuitable jobs. When transitioning jobs becomes cumbersome, workers are likely to cling to their current positions—even if their skills could be better utilized elsewhere. This stagnation disrupts the natural churn of the labor market, preventing talent from flowing to its most productive applications, ultimately leading to inefficiencies that harm everyone involved.
Slow hiring impacts all labor markets, but it poses particular challenges in sectors like fast food and app-based services, where turnover rates are typically high. In fast food, turnover can exceed 130% annually, and while precise data on app-based services is harder to pin down, estimates suggest turnover rates may be as high as 97% per year. Essentially, this means a vast majority of these workforces are continually cycling through new hires.
However, the risks extend beyond just these sectors. Fast-food and app-based jobs often serve as temporary solutions for workers transitioning from other fields. A banker, for instance, may rely on rideshare driving as a stopgap while searching for a new position. If the job market becomes more rigid, such bridging opportunities will dwindle, leaving workers with fewer options.
The unintended consequences of these laws are far from what the lawmakers envisioned. While their intentions likely stem from a desire to bolster job security, the economic realities suggest otherwise. The laws may ultimately increase unemployment and negatively affect the workforce. In this context, they merit a policy equivalent of a red card.
