Litigation Costs and Returns to Experience

We study the relationship between maximum damage awards available to plaintiffs in wrongful termination lawsuits and the returns to experience among protected workers. In our model, firms dismiss some workers for cause (as they learn about worker ability), but may also discriminate. If factors affecting displacement and worker litigiousness vary with worker experience, then increases in damage awards will affect returns to experience by making those workers who are more likely to litigate more costly to employ. This reasoning suggests a relationship between damage awards, workers' propensity to sue as a function of experience, and returns to experience. The passage of the Civil Rights Act of 1991 (CRA91) provides an opportunity to assess this relationship empirically. We use data on Equal Employment Opportunity Commission filings to compare rates at which blacks and women file complaints, and examine changes in returns to experience for these groups using the Current Population Survey. Wrongful termination complaint rates among women drop sharply with age, while complaint rates for blacks increase slowly with age. Consistent with our model, we find an increase in the returns to experience for women following the passage of CRA91, and no change in returns to experience for blacks. Our analysis suggests that employers' reactions to employment protections may induce redistributive effects, and that these effects operate not merely across groups of differing protected status, but also within groups of identical protected status