Judicial enforcement as a worker discipline device

We develop an efficiency-wage model with firing costs, judicial delay, and judges’ pro-labor bias. When workers dismissed for personal reasons are not entitled to severance pay, a double moral hazard emerges: firms may disguise redundancies as disciplinary dismissals, and caught shirkers may litigate for wrongful termination. The impact of employment protection legislation—and its imperfect enforcement—on the efficiency wage depends on how the institutional environment shapes these strategic behaviors. In one of five possible settings, the efficiency wage decreases with pro-labor bias and increases with judicial delay. Using data on French labor courts and hourly wages, we find correlational evidence consistent with this prediction: wages correlate negatively with judicial delay and positively with pro-labor bias.