The Economic Costs of Court Decisions Concerning Dismissals in Japan: Identification by Judge Transfers

The goal of this paper is to detect the degree to which court decisions control the stringency of employment protection and investigate how such judicial discretion affects labor market performance. However, Identification difficulty arises because court decisions are volatile against economic and social conditions. This paper overcomes the endogeneity problem by exploiting the triennial judge transfer system in Japan, or the exogenous allocation of judges to prefectures. Specifically, I estimated the judge-specific effects from litigation records and instrumented them to the judgment indicator in the original model. A key finding in this paper is that prefecture employment rate is reduced by approximately 1.5% if a prefecture receives more pro-worker judgments than pro-employer ones in a given year. Interestingly, the result is robust to the instrumental variable estimates only if the sample includes observations of the Tokyo and Osaka Prefectures. Thus, judges assigned to these prefectures have played leading roles in exogenously establishing the doctrine of abusive adjustment dismissals, whereas the rest of the variation in judgments is reversely explained by local labor market performance.