Depression Economics

There's an interesting discussion at skepticlawyer of the responsibilities of job-seekers in declaring their medical and personal history to prospective employers. It springs from an ongoing case in which Cheltenham Borough Council are seeking £1million in damages from a former Managing Director who left her post due to depression after two and a half years of fractious employment. The council claims that the employee knowingly failed to disclose her history of medical treatment for depression when applying for the post, and, in stating that she didn't suffer from a disability and was in good health, she deliberately misled them. The implication of the council's argument, however, might backfire: if they accept depression a disability, they might find themselves deluged in applications for parking permits.

An alternative that is presented to the expensive legal battle now underway is the contract at will, wherein employer or employee can terminate the agreement at any time for any reason. Richard Epstein defends this arrangement as economically optimal - both in individual employment affairs and in legal construals of incomplete contracts - in a cogently argued paper. In it, he counters the typical claim of employer exploitation of dispensable workers in such arrangements by observing that the institutional structure of contract at will incentivises employers not to frequently and arbitrarily rotate staff:

"Any party who cheats may well obtain a bad reputation that will induce others to avoid dealing with him. The size of these losses tends to differ systematically between employers and employees - to the advantage of the employee. Thus in the usual situation there are many workers and a single employer. The disparity in number is apt to be greatest in large industrial concerns, where the at-will contract is commonly, if mistakenly, thought to be most unsatisfactory because of the supposed inequality of bargaining power. The employer who decides to act for bad reason or no reason at all may not face any legal liability under the classical common law rule. But he faces very powerful adverse economic consequences. If coworkers perceive the dismissal as arbitrary, they will take fresh stock of their own prospects, for they can no longer be certain that their faithful performance will ensure their security and advancement. The uncertain prospects created by arbitrary employer behaviour is functionally indistinguishable from a reduction in wages unilaterally imposed by the employer. At the margin, some workers will look elsewhere, and typically the best workers will have the greatest opportunities. By the same token the large employer has more to gain if he dismisses undesirable employees, for this ordinarily acts as an implicit increase in the wages to the other employees, who are no longer burdened with uncooperative or obtuse coworkers."

[emphasis added]

Now, extending the purview to that which is not seen, Epstein argues that increasing the burden of proof on an employer when firing employees is only superficially beneficial for the working class:

"Where an employer might have been more willing to take risky employees under an at-will rule, he will now be less willing to do so under the for-cause rule because any subsequent demotion or dismissal will be an open invitation to a lawsuit by an aggrieved employee. Furthermore, in most at-will situations, the dismissed employee is replaced by another, so it is hard to see how employees as a class benefit from a rule that can only hamper general mobility in labour markets."

The same point is made by skepticlawyer:

"Instead of just giving Ms Laird the sack (the virtue of the contract at will), Cheltenham Borough Council (and others like it) — all doubtless hamstrung by employment laws that make it hard to sack people when they’re clearly skiving off for whatever reason — would like to make it extra difficult for all people with mental illness to get work. The many are made to pay for the sins of the few."

As is invariably the case with policy judged and implemented solely on the basis of good intentions, the widespread unintended consequences are more subtle and pervasive than the short-lived immediate gains to certain specific beneficiaries.