Augmenting Employees’ Efforts in Innovation

Strong labour laws play a major role in motivating innovation among employees. It has been found in the literature that stringency of labour laws is positively linked with employees’ efforts in innovation, in particular, wrongful discharge laws (WDL). However, employees may also bring nuisance suits against employers. Usually, the result of these suits is that both parties settle with each other. Thus, even if employees are justly dismissed, they may be able to bring nuisance suits against employers and gain a settlement amount. This article investigates how the possibility of nuisance suits affects the impact of WDL on employees’ efforts in innovation. In this respect, a game-theoretic model is developed in the article to find the equilibrium level of employees’ efforts in the presence of nuisance suits, where there is a possibility of employees getting discharged from the firm. I find that if nuisance suits are a possibility, the stringency of WDL has no impact on employees’ efforts if defence cost of the firm is low; but for higher defence costs, WDL affects employees’ efforts. The efforts exerted by an employee are found to be weakly increasing in the defence costs of the firm.

Employment Protection and Banking Power: Evidence from Adoption of Wrongful Discharge Laws

Human capital and labor costs are crucial for the sustainable growth of organizations, and take a vital role in affecting bank efficiency and banking power. This research empirically investigates whether labor employment protection affects banking power. The analysis exploits the staggered adoption of Wrongful Discharge Laws (WDLs) as a quasi-exogenous shock to employment protection. A Difference-In-Difference research design is implemented to study the impacts of WDLs on banking power, and the main results show that there exists a decline of banking power for commercial banks headquartered in states that adopt employment protection. This study further tests the main mechanism through which WDLs affect banking power and finds that the impaired banking power is primarily due to cost inefficiency but not profit inefficiency. Moreover, the adoption of wrongful discharge laws increases commercial banks’ labor costs and induces bank risk-taking.