Are Judges Biased by Labor Market Conditions?

When a firing litigation is taken to court, only the characteristics of the employees misconduct should be relevant for the judges decision. Using data from an Italian bank this paper shows that, instead, local labor market conditions influence the courts decision: the same misconduct episode may be considered sufficient for firing in a tight labor market but insufficient otherwise. We reach this conclusion after taking carefully into consideration the non-random selection of firing litigations for trial. Although these results refer to the specific situation considered, they raise more general issues. For macroeconomists they suggest that higher unemployment rates may increase firing costs via the effect on courts decision criteria; thus, the real extent of firing rigidities cannot be assessed without considering the role of courts. For labor law scholars, these findings are important because, following traditional principles, the law should be applied in the same way for all citizens and over the entire national territory.