Volume 77 Symposium


Switching the Default Rule

Cass R. Sunstein

There is a standard analysis of default rules in contract law, including those forms of contract law that fall under the label of employment law. But behavioral economics raises many complications. Professor Cass R. Sunstein explains that the default rule can create an endowment effect, making employees value certain rights more, simply because they have been granted such rights in the first instance. New evidence, based on a survey of law students, is introduced to show a significant endowment effect in the context of vacation time. Similarly, the default rule for savings plans, set by employers or by law, seems to have a large effect on employee behavior. When the default rule affects preferences and behavior, conventional economic analysis seems indeterminate; either default rule can be efficient. In employment law, analysis of distributive consequences also suggests the difficulty of deciding which default rule to favor, because any switch in the rule is unlikely to have significant redistributive effects. Nonetheless, switching the default rule can, in certain circumstances, have desirable effects on workers’ welfare. A central question is whether the stickiness of the default rule reflects a genuine change in values, or instead, employee confusion or bargaining strategy.

The Behavior of Defined Contribution Plan Participants

Susan J. Stabile

Defined contribution plans empower employees to effectively save money toward their retirement in a tax-favored fashion. The retirement benefits that employees actually receive depend on four decisions that they have to make: whether to participate in the plan, what percentage of salary to contribute to it, how to invest these plan contributions, and, if the employee leaves the job prior to retirement, whether to take a current cash distribution of their 401(k) plan account balance or allow the account balance to continue to accumulate. In her contribution to the Symposium, Professor Susan J. Stabile explores the behavioral tendencies that affect participant behavior in defined contribution plans and how the current legal regime influences that behavior. Her research finds that the current statutory regime has not produced economically rational decisions among employees. Professor Stabile provides a number of avenues that can be explored for promoting employee decisions that would maximize retirement security and can serve as a springboard for future research.

Fairness, Minimum Wage Law, and Employee Benefits

Christine Jolls

Often employers will agree to pay their employees more than the minimum the employees would accept for performing the job in question. One reason for this behavior is that such “fair” treatment by employers may encourage better job performance by employees. In her contribution to the Symposium, Professor Christine Jolls examines some of the legal implications of this “fairness dynamic.” Empirical evidence strongly supports the idea that some employers will offer to pay employees more than the minimum amount the employees would accept in order to induce them to exert more effort, and that employees respond in turn by working harder. Fairness behavior is of special relevance to employers when monitoring and punishment for inadequate performance would prove difficult Once the fairness dynamic described here is taken into account, the argument for the minimum wage requirement imposed by the Fair Labor Standards Act is undercut in situations where employees are relatively difficult to monitor, as fairness considerations will tend to drive the wage up regardless. This legal conclusion is a reminder that while behavioral law and economics may sometimes be more likely than traditional law and economics to support legal intervention, in other cases the opposite is true.

The Difficult Path from Observation to Prescription

Samuel Issacharoff

While the law of the American workplace presumes that the market for employment operates as formal economic theory would predict, it would be difficult to find an area of law where the governing conceptual model is at such disjuncture from the law as applied. Professor Samuel Issacharoff argues that behavioral law and economics is the latest model that attempts to explain this disjuncture. However, he provides two cautions to the application of this model. First, he notes that the empirical observations that this model offers are amenable to conflicting interpretations and thus possess a limited ability to offer reliable generalizations. Additionally, he explains that even if the empirical foundations were solidified, empiricism itself does not generate normative conclusions.

Human Behavior and the Economic Paradigm at Work

Samuel Estreicher

The Law Review deserves kudos for publishing this Symposium drawn from Articles and Essays presented at last year’s Research Conference on Behavioral Law and Economics in the Workplace, sponsored by New York University’s Center for Labor and Employment Law. Authored by leading scholars in the field, these Articles and Essays promise to spark debate on the implications of the growing, largely experimental behavioral literature for employment law and workplace governance.

How Wrong Are Employees About Their Rights, and Why Does It Matter?

Cynthia L. Estlund

Most employees are terminable at will, yet apparently most believe they only can be fired for cause. That belief persists in the face of a standard at-will disclaimer. In this Essay, Cynthia Estlund explores some causes, consequences, and possible legal responses to that gap between employees’ beliefs and reality. She suggests first that employers, by acting as if they must justify discharges, may foster employees’ erroneous beliefs by contradicting the words of a disclaimer. Whatever its source, the gap is problematic because it allows employers to enjoy both the benefits of employee perceptions of job security and the benefits of employment at will. In principle, switching the default to “for cause” should help bridge the gap. A weak default, however, would be defeated by an at-will disclaimer, and would accomplish little. Employers already act as if the default is “for cause” and disclaim it; employees do not credit that disclaimer. A stronger default, such as a waivable right to for cause protection, holds greater promise. If the standard for waiver is high enough to ensure that employees understand their rights, employers would have to choose between the benefits of employees’ expectations of job security and the benefits of employment at will. This Essay concludes by sketching a case for bringing the law into line with employees’ optimistic beliefs.

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