Judicial Arbitration of Unfair Dismissal Cases: The Role

of Peer Effects
Authors’ names and affiliations removed
April 10, 2020

Abstract
The paper analyses how peer effects affect judicial decisions over dismissal disputes
in Australian labour courts. Using a panel of judges and data over 2000 unfair dismissal
decisions we first test for selection effects and for randomized matching of judges to cases.
We then exploit this random experiment setting, using spatial econometrics methods to
test whether individual judges’ decisions depend on the behaviour and/or characteristics
of their peer group. We do not find evidence of endogenous peer effects, but we find
significant exogenous peer effects.
Keywords: Judicial decisions; unfair dismissal cases; peer effects.
JEL codes: C23; J52; K31; K41.

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1 Introduction
What factors, other than the intrinsic characteristics of cases, influence the decisions of judges
arbitrating unfair dismissal cases? Answering this vexed question matters a great deal, not
only for the parties involved in a dismissal dispute but also for policy makers evaluating how
legislation designed to provide basic worker rights is enforced in practice. In the context of
Australian labour courts, our previous research (?) considered the influence of social values
on judicial decisions. Specifically, we examined how judges’ own social values (proxied by
their past history as labour lawyers) together with the values of the political party appointing
them affected their decisions. We examined the extent to which these factors were significantly
related to judges’ propensity to decide cases in favour of the plaintiffs (dismissed employees).
We then interacted these values with the social values embodied in the law (legislated statutes
and their reforms). We found significant effects from all three channels, particularly after
the so-called WorkChoices reforms, which made access to unfair dismissal remedies more
difficult for dismissed employees. Ceteris paribus, judicial decisions in dismissal cases varied
significantly with (and were predictably signed by) the social values of judicial appointees
and political appointors. Judges whose social values were unaligned with the WorkChoices
reforms responded orthogonally, i.e. by meting out decisions unaligned with the reforms. In
other words, we found significant evidence that labour court judges behave as activists.
In the present work we push our investigation further to check for the influence of other
judges on individual judges’ decisions (peer effects). Our objective is to determine whether
labour court judges operating in the same jurisdiction (State-based panels) influence one
another’s decisions. If spatial correlation among decisions was established, we could infer
that the significant political activism effects found in our previous study may spillover onto
the behaviour of non-activist judges, providing an expansion channel for the spread of activism
in labour courts. The presence of strong peer effects would have substantial implications for
policy designs aimed at countering political activism in labour courts. For instance, attempts
to take judicial nomination and appointment prerogatives away from government 1 ? would
presumably be less effective if political activism in the courtroom stemmed to a larger extent
from judges’ peer groups than from ideologically-motivated politicians.
There is much that researchers can do to isolate peer effects and we review a number
of approaches and findings in ou literature review section below. The spatial econometrics
methodology pioneered by Charles Manski (1993) is by far the most popular method, al-
though it has too rarely been used to examine judicial decisions, and its scope for ill-advised
attributions of causality has been a recurrent subject of controversy, which we will also touch
on (?, ?). The Manski approach ? rests on a decomposition of peer effects into two broad
types of hypothesized interactions: endogenous or behavioural interactions and exogenous
1
This was, in essence, the recommendation the Productivity Commission of Australia, a statutory agency
set up as an independent authority, made to the Australian Federal Government in early 2016. Its recommen-
dation 3.3 (section 3.3 p.50) was for the Australian Government to amend the Fair Work Act 2009 (governing
the unfair dismissal statute) to change the appointment processes for members of the Fair Work Commission
(the Federal labour court) by setting up an independent expert appointment panel tasked with shortlisting
suitable candidates. The Commission also stressed that ”In making appointments to the panel, governments
should avoid appointing people who, in the last ten years, have had professional experience displaying a sig-
nificant involvement representing employees and employers in courts and tribunals, or active participation in
public debates regarding workplace relations policy”.

2
interactions. Endogenous effects arise when individual behaviour depends on the average
(aggregate) behaviour of the group: in our context, individual judges may decide more often
in favour of dismissed employees because that is what their peers do. Exogenous effects arise
when individual behaviour depends on the exogenous characteristics of their reference group:
in this case individual judges may decide more often in favour of dismissed employees not
because their peers do so but, say, because the composition of their peer group is exclusively
made out of former union lawyers. Endogenous effects are of particular interest because they
can give rise to ‘social mulitpliers’: an intervention that alters behaviour in the reference
group will tend to be more effective due to behavioural spillover effects within the reference
group. Identifying social interactions with spatial econometrics methods is fraught with sev-
eral difficulties that have to be overcome : there can be selection bias2 through endogenous
group formation (e.g. if judges are only appointed when they have previously worked with
currently serving judges), or there could be correlated effects that arise when members of a
reference group behave similarly because of an unobserved similar institutional feature (e.g. if
all judges were instructed by the same expert). We will test for these potential issues and show
why they do not present identification problems for our study. However, the largest hurdle to
overcome is addressing the so-called ‘reflection effect’, which arises from the simultaneous and
reciprocal nature of the relation between outcome (individual judicial decision) and regressor
(average or aggregate peer decisions). In our estimation section we present our approach to
dealing with both the correlated effect issue (omitted variables) and the reflection problem.
In this paper, we apply spatial econometric methods to a panel of 82 judges and a data
set of 2,223 unfair dismissal cases arbitrated over a 15 year period to test for the presence of
endogenous and exogenous effects in judicial decisions (the autonomous political appointment
process largely rules out the selection effect). In doing so, we will address a number of the
above mentioned potential methodological issues that could invalidate our results, such as
the need to establish the conditions of a randomized experiment and to address the reflection
problem. Section 2 reviews the academic literature on the drivers of judicial decisions-making
in employment disputes, with a particular focus on peer effects. Section 3 presents the context
for this research, and the data used for the analysis. Section 4 presents a set of preliminary
tests performed on the data to ensure it is suitable for use in our spatial econometric model.
Section 5 presents our model specification, our estimation strategy, and our results, whereas
section 7 presents our conclusions.

2 Related literature
2.1 Arbitration of employment disputes
There is a considerable literature examining the determinants of judicial behaviour partic-
ularly in the United States where this strand of research originated in the post-war period.
This literature, published in law, economics, industrial relations and political science jour-
nals, focuses on establishing the likely personal and professional motivations for judges and
arbitrators to decide cases and how changes in institutional design, political context, or socio-
economic circumstances may affect these motivations. Much of this research examines the
2
Manski’s selection effect is not to be confused with the Priest-Klein selection effect, which we also address
in this paper.

3
political motivations of judges and particularly how their ideological positions and policy
preferences exert influence over public policy and the regulatory process (see ?, ?, ?, ?, ?, ?,
?, ?, ?). Others researchers have looked at the careerist motivations of judges (?, ?, ?), their
quest for power and control ?, their aversion to workload (?) and to decision reversals (?, ??),
their preference for reputation and prestige (?, ?), the influence of their peers (?, ?) and how
all these incentives and constraints vary with different legal systems (?, ?). Good reviews of
the research evidence regarding political activism in legal jurisdictions can be found in ?, ?
and ?.
Although much of this extensive body of literature visits other areas of the law than the
employment protection statutes of interest in our investigation, there is a long history in the
American industrial relations literature of researching the decisions of labour- and employ-
ment arbitrators in employment and workplace disputes. For instance, ?, and later ? argued
that US labour arbitrators decide employment disputes based on self-interest (maximising the
chance of being re-selected as arbiter in the future). ? finds that labour arbitrators’ decisions
reflect the dominant social values of their time, particularly the efficiency paradigm. ?, ? finds
no correlation between arbitrators’ characteristics and their decisions, except for their degree
of experience, which is positively correlated to decisions in favour of employers. In several
scenario experiments ? and ? find no or little relation between arbitrators’ biographical char-
acteristics and their actual decisions, whereas ? find much inconsistency among arbitrators
decisions, which they cannot attribute to age, gender, experience or other arbitrators char-
acteristics ? and ? examine the decisions of employment arbitrators (i.e. non-union sector),
which they find less favourable to the employee than those of labour arbitrators (deciding
disputes in the union sector).
Unfortunately, none of these studies help answer our research question because, in the
American context, employment arbitrators are private intermediaries chosen or agreed to by
the parties (?) rather than quasi-judges nominated by an incumbent government. Political
activism in courts is a highly researched theme in the US but not in the context of employment
disputes. The few attempts to examine the politics of labour court decisions revolve around
the work of the National Labor Relations Bureau (NLRB), an agency created as part of the
New Deal reforms of the 1930s but which ever since has become increasingly politicised and has
struggled for relevance as a labour court (?). ? for instance examine the politics and ideology
of judicial decision making over labour relations but find that influence over major labour
relations decisions rests with the Supreme Court and Congress, the former deferring very
little to the NLRB and the latter wielding significant influence over it. ? compare the degree
of political bias (ideology, pressure) exerted over NLRB and BAG (BundesArbeitsgericht,
the German Federal labour court) decisions. They find, interestingly, that political bias in
NLRB decisions stems both from appointment bias and from direct influence by Congress
(they also find evidence of appointment bias at the German BAG but find little evidence of
undue influence exercised by the Bundestag, the German Parliament).
There is much less research on the political activism and other determinants of dismissal
dispute arbitration in contexts other than the American arbitration system. In Europe, ? and
? have shown for Italy and the UK respectively that labour court judges take economic con-
ditions into account when they make rulings over layoffs and dismissal disputes. ? deduct the
presence of nomination and appointment bias in German higher labour courts (Landesarbeits-
gericht) from correlation between judicial decisions and the political leanings of the appointing

4
state government. They find downstream spillovers onto lower labour courts (Arbeitsgerichte)
and adverse effects on employment. They recommend a more independent nomination pro-
cess based either on peer review or devolution to a third party. In France, ? examine labour
courts decisions over a 16 years period but find that the ideological composition of the courts
only influence litigants’ settlement behaviour (not judicial decisions).

2.2 Peer effects in courts

Peer effects have been studied in the context of judicial decision-making but rarely using
spatial econometrics methods and even less in the context of labour court decisions. Most of
the time, these studies examine individual interactions on multijudge (e.g. appellate) panels.
For instance, ? use two-way associations and a probit model to study panel effects in ‘gendered
judging’: male judges are less likely than female judges to rule in favour of (overwhelmingly
female) plaintiffs in sex harassment and sex discrimination cases but this effect dwindles when
they serve on a panel with female judges, implying that the gendered composition of a panel
matters to a judge’s decision. These findings are confirmed and further discussed in ? using
semi-parametric matching methods. Despite the different context and methods, these panel
effects raise similar questions to the ones we examine in this paper: if male and female judges
have different mindsets about what defines sexual harassment or act as representatives of a
social class or demographic group, the scope for influencing one another’s decisions appears
limited. However, if female judges possess relevant and specific information sourced from
their professional expertise or from their life experience, sharing that information with their
uninformed male counterparts may lead to the observed panel effects ?. ? also find panel
effects in gendered and multi-ethnic judicial panels but attribute it to the informal yet binding
rule of panel unanimity. Panel unanimity may induce minority group judges to endorse an
opinion they disagree with for a host of ”suppressed dissent” (such as lack of time, panel
loyalty or loneliness of dissent factors, for which they find little evidence) but it may also
enable minority group judges to extract concessions for unanimity thus influencing the final
ruling (for which they find stronger evidence). The empirical work of ? also supports the idea
that in close cases, deliberation and panel collegiality may lead judges to change their opinion
when presented with persuasive information or arguments from fellow judges. Often these
effects will tend to move individual positions away from extremes and towards the center ?.
By contrast with these studies, the spatial econometrics literature, which took off in the
wake of Manski’s seminal paper searches for peer effects in other domains. By and large most
of the applications of this method have aimed at isolating the influence of peers on individuals’
educational performance, with mixed results (see ? and ? for recent reviews). The use of
spatial econometrics to identify peer effects has regularly been subject to calls for caution,
with a more forceful intervention by ?. Subsequent work has generally tended to defer to this
critique. ? for instance discuss the problem of exclusion bias (individuals cannot be their
own peer) and the conditions under which 2SLS does not suffer from this bias. In our case,
thanks to richer information, we are able to specify a model that is less prone to the concern
raised by ?. We discuss in further detail in the Section .
The method has been employed to evaluate peer effects in a wide variety of setting in-
cluding corporate investment (?), paid paternity leave (?), tobacco consumption amongst
the youth (?, adoption of PV panels (?), adolescent participation in violent crimes (? and

5
?, school scores after post-disaster relocation (?, workplace productivity (? and ?) and
adolescent obesity (?).
We are aware of only one study using spatial econometrics to isolate peer effects in labour
courts arbitrating labour disputes. ? use spatial data from judicial registries in Spain to
evaluate judicial peer interaction over the period 2006-2010, a period characterised by large-
scale layoffs in a country stygmatised by the great financial crisis of 2008-9. Their dependent
variable is the same as ours, dismissed worker success rate in courts, but their focus is not on
political activism. Instead they infer the presence of emulation effects (pure peer influence)
and reversal effects (fear of decision reversal by higher appellate courts). They conduct
their analysis at different levels, geographical- and (non-geographical) legal-administrative
boundaries. They find spatial correlation at the (local) legal-administrative level but none at
the (inter-regional) geographical level.

3 Institutional background
3.1 Labour courts in Australia
The Fair Work Commission (FWC) is the labour court in charge of conciliating and arbitrating
a range of labour market disputes in Australia. It is divided into ten panels, one of the most
prominent ones being the Termination of Employment Panel (TEP), which is composed of
six State jurisdictions: Victoria, New South Wales, Queensland, South Australia, Western
Australia and the Australian Capital Territory. Judges of the TEP (‘commissioners’) are
appointed on a permanent full-time basis until they reach 65 years of age. They are appointed
by the Governor-General of Australia on the recommendation of the government of the day.
Nominations for labour court appointment are based on candidates’ demonstrated expertise in
workplace relations, labour law, business- or organized labour management, knowledge of the
workings of specific industries, etc. Judges are selected from a diverse range of occupational
backgrounds, but most are labour lawyers and attorneys3 . Although they are in the main
former union lawyers or representatives of employers, Fair Work commissioners are instructed
to act like judges and put their work history aside when they make decisions.
Other FWC panels (e.g. Industrial Action, or Minimum Wages) allocate cases to judges
on the basis of their industry-specific background but this is not the case for the TEP where
case allocation operates through a random process. At the start of each month, the Head of
the TEP fills a roster, which matches State–specific judges to State-lodged cases through a
lottery4 . There are no permanent representations of the TEP in Tasmania and the Northern
Territory. All Tasmanian cases in our data are decided by the same commissioner (from
the State of Victoria). Matters in the Northern Territory are allocated to the member on
the roster for the month in which a particular file is listed. Matters will occasionally be
allocated to members in states other than where the parties are located. This includes files
requiring arbitration as well as those with jurisdictional issues. There are a number of reasons
for occasional interstate allocations such as peak workload or attrition of judges in specific
3
A small minority of commissioners are former businessmen, human resources managers, industry experts,
union delegates or civil servants.
4
There are a few (minor) exceptions to this rule. In the Western Australian representation of the TEP
cases are allocated ‘off the clock’ to whichever judge is available at that precise moment.

6
States. One member from the New South Wales court usually also sits on the Queensland
roster for unfair dismissal arbitrations.

3.2 Cases, judges and peers

Our data is collected from electronic transcripts documenting the decisions of labour courts
(Fair Work Australia, FWA, and its predecessor, the Australian Industrial Relations Com-
mission - AIRC) in unfair dismissal disputes. Transcripts are public domain information,
which record factual information about the parties’ background and their respective allega-
tions. Transcripts of decisions report the testimonies of witnesses and the outcome of the
case. The information is sometimes difficult to harmonise because judges do not report their
decisions in a standardized format. We recorded all cases for which we have a transcript over
the period January 2001 - June 2015, which provided us with 2,876 arbitrated claims. We
recorded elementary data such as cases’ legal reference, the statutory regime that governs
the cases, their lodgement date, the judge’s identity, the dates of hire, dismissal, lodgement
and judicial decision, the gender and age of the plaintiff, the sector of activity of the em-
ployer, the occupational group of the dismissed employee, the type of representation for both
sides, alleged reasons for fair or unfair dismissal, and the judge’s decision. If the decision is
favourable to the employer, we recorded the variable Award as 0, otherwise we recorded it as
1. We excluded about 9 percent of arbitrated claims where one of the parties failed to appear
in court because the outcome of such cases is highly predictable (absentees always lose the
case) and it seems that most of these cases started to appear after 2010 (introducing bias).
As the amount of detailed information included in the transcripts varies a great deal, in some
cases not all the relevant information was available. We therefore also excluded 124 cases
for which the parties’ claims could not be ascertained; 35 cases for which the characteristics
of the commissioners are missing, and 248 cases where the key characteristics of the cases
are missing. We further dropped five cases which are the only ones ever ruled by the four
commissioners involved. As the cases in ACT (the Australian Capital Territory) are decided
by a single commissioner, they are also excluded from the analysis. This results in 2,151 cases
in the sample for analysis (over three quarters of our initial sample of cases). Table 2 lists the
variables we use for the analysis. In Table 3, we present the sample statistics. More detailed
information on the sample can be found in ?.
From the table, we can see that, about 18 per cent of the cases involved manufacturing
businesses, about 22 per cent of the unfair dismissal claimants were occupied in highest skill
professions (with skills ranked on a scale from 1 to 5). About one in five case involves
employee allegations of some form of procedural unfairness in the dismissal process by the
former employer. On the other hand, in about 33 per cent of all cases, employers’ major
counter-arguments against employee allegations are that the dismissal was for unambiguous
substantive reasons, such as gross misconduct. Most of the disputing parties are represented
in court: an average 71 per cent of employees and 79 per cent of employers used some form of
representation, but both employers and employees tended to be less often represented in later
regimes. Geographically, more than 70 per cent of the cases are located in New South Wales
and Victoria, Australia’s two largest and most urbanised States (accounting for 58 percent of
the population). The characteristics of the cases vary somewhat across the different statutory
regimes presented in previous sections. For example, in later years and later statutory regimes

7
less disputes are lodged by manufacturing workers, but more cases are lodged by highest-skill
workers. Of the 80 commissioners, 64 per cent are appointed by Labour governments; 39 per
cent are former union officers; and 36 per cent are former members of employer associations.
We categorised judges according to their work history by using and updating the appendix
provided in ?, which records the previous work history of Australian labour court judges using
public media, parliamentary records, academic literature and online Who’s Who searches.
Since Southey and Fry’s data stops at 2005, we extended their record of judges’ work history
and political appointment to identify union or employer association backgrounds for the most
recent years. Work history consists of whether a judge worked for a union or an employer
association prior to their appointment. Judges were recorded as not having an employer or
union background if information on the judge’s background was available, and this background
was not listed. In a small number of cases the background information could not be found at
all, in which case the variable was recorded as missing.
Peer reference groups were assembled by pooling together judges of the same State ju-
risdiction. There are obvious reasons for establishing peer groups along lines dictated by
geographical jurisdiction. For complex constitutional reasons, Federal coverage of industrial
relation matters such as unfair dismissal law increased very gradually over time. Most States
bar Victoria and the two non-permanently represented States mentioned above, have long
operated their own State-based labour court system alongside a somewhat subdued Federal
system (which until 2009 barely covered half of the Australian workforce). Statutory rules
and formulas used in State-run courts for determining remedies generally varied little with
the standards applied in Federal courts (which our study focuses exclusively on). At peak
times, State judges deciding State-lodged cases would often fill in for Federal judges decid-
ing Federally-lodged cases from the same State (and vice versa). In other words, the State
boundary defines a community of judges who, having first worked and trained in the State as
labour lawyers, worked across two very similar industrial relations systems with well-defined
quid pro quo rules and peer networks. In his review of what drives judicial behaviour in
Australia and New Zealand, ? argues that judges of lower court (such as labour courts) ”are
likely to have a more narrow reference group [than judges of higher (appellate) courts], which
is restricted to their colleagues in the same court and the lawyers who appear before them”.
All State-based systems were subsumed into the federal system after the Fair Work reforms
implemented in 2009 but the Federal system keeps in place State divisions for the lodgement
of claims, appointment of judges and allocation of cases to judges.

4 Preliminary checks
We start by addressing two preliminary issues related to our use of tried cases: testing for
selection effects and establishing the conditions of a randomized experiment. The selection
effect (?) holds that tried cases are more complex than the mass of settled cases because
settlement weeds out cases where the evidence compellingly backs the claims of a specific
party to the dispute. Only those cases with conflicting and inconclusive evidence then proceed
to trial. If this is the case, trial cases are knife-edge matters that, on the pure substance of the
case, should be decided by very small margins. In the absence of other influences, the success
rate in these cases (the dependent variable in our study) should exhibit a fifty percent density.
It is then difficult to establish evidence of political activism or peer effects because selection

8
effects would nullify them: ‘something’ has to decide knife-edge cases but that ‘something’ is
nearly unidentifiable; it could be as (?) put it ”what the judge ate for breakfast”.
This selection effect hypothesis has been tested in a large number of litigation settings,
drawing support and criticism but its influence is such that inferences from any empirical
association drawn from changes in the win-loss percentage of tried cases have often been met
with scepticism by researchers. There are grounds to believe that even when selection effects
are present, they may not be strong enough to nullify impacts on case outcomes of changes in
the social values of judges and their peers. First, the selection effect is premised upon many
restrictive assumptions, including the presumption that the parties are perfectly informed and
that the error distributions of both parties are the same and symmetric. If there is information
asymmetry between the disputing parties or if the prediction error by the parties does not
go to zero, selection effects are partial and case outcomes could indeed be affected by other
factors such as those of interest in our study. Second, empirical findings are often at odds with
what the selection effect hypothesis predicts, even though there is a consensus on the presence
of said effect. For example, many studies find that the plaintiff success rate varies with both
case and/or judicial characteristics. Finally, the assumption that both parties predict the
case’s winning probability with equal effectiveness is also too restrictive. In unfair dismissal
disputes, it is likely that employers (especially, the larger firms) who are repeat players in
these (and other) disputes, have more resources, are more experienced and therefore better
able to predict the chances of winning the case than dismissed employees who usually are
one-shot players. If this is the case, then court outcomes should differ from 50-50 outcomes.
We evaluate the presence of a selection effect by testing whether annual claimant success
rates are sufficiently close to 50 percent for each of the 15 years covered by our study. Table
1 reports the results of this t−test. We find that except for the first two years, reporting
years 2001-2 and 2002-35 , we can reject the null hypothesis. We also find that prediction
capacity differs among the parties, and those who can hire legal professionals are in a better
position to succeed. This finding is consistent with our contention that assuming the parties
to be equally able to predict the chance of claimant success is a very restrictive aspect of the
selection effect model.
Another hurdle to overcome is to establish randomized allocation of cases to judges: if
litigants know in advance which judge will decide their case they may pull out (or press
on) when they think the identity of the judge lowers (raises) their chance of success. Of
further concern still, if judges could cherry-pick among dismissal cases they may themselves
self-select into (or out of) some types of cases. Either way, our identification strategy would
be compromised. In order for us to successfully and convincingly link a judge and her peer
group’s behaviour and characteristics to her decisions, it is essential that the set of cases
that she decides has on average the same characteristics as the cases faced by other judges.
In other words, it is essential to establish randomness in the process allocating cases to
commissioners. Even though cases are indeed randomly allocated to the commissioners, many
cases are ‘conciliated’ (settled) before they reach the arbitration stage (a hearing in court).
The conciliation and settlement stage is managed by different personnel (other judges, public
servants, etc.) than the commissioners eventually in charge of deciding the case in court. If
a case fails to settle, conciliators authorise the case to proceed to arbitration (hearing and
decision), which is the stage at which the case is allocated to the commissioner. However,
5
Labour courts’ reporting years start on July 1st of one year and end at June 30th of the subsequent year.

9
not all unsettled cases reach arbitration. Many are withdrawn along the way, or informally
settled ‘under the shadow of the law’. If such case drop-outs are not randomly distributed
among commissioners (e.g. some commissioners exerting an influence on the parties so that
no hearing takes place) then our analysis would give inconsistent estimates.
In ?, we conducted a series of F −tests after regressing various case characteristics on
commissioner dummies, essentially following the method used by ?. If commissioners exerted
no undue influence on drop-outs, then the remaining cases reaching arbitration should still
remain randomly allocated to commissioners, and commissioner dummies should be expected
to have little explanatory power in these regressions. As commissioners by and large operate
within the confines of their respective State we conduct these exercises separately for each of
the three largest states, New South Wales, Victoria, and Queensland, where a large majority of
our cases are located. The tests are conducted separately for each regime to ensure a relatively
homogeneous time period. We test for randomness across 10 key variables of our database
of cases, and report the number of commissioners (bracketed) and cases for each State and
regulatory regime. The explained case characteristics include those of the employees: industry,
skill level, and gender; and those relating to the nature and complicity of the cases: whether
multiple allegations are made by each party, the type of allegations by each party, whether
they are represented, and whether the case is summary one. The P −values of these F −tests
show that in most of the tests, the null hypothesis that commissioner dummies are not jointly
significant is not rejected, which indicates that the cases reaching courts are most probably
randomly assigned.
Overall then, the results of our tests comfort us in the belief that labour courts do indeed
randomly match cases with commissioners. The results for NSW (the most represented State
in our sample) are particularly salient with no significant relationship under any of the four
regimes (no occurrence of 5% level significance). The hypothesis of randomness is not rejected
for all but one of our 10 key indicators at the 5% level, and in two cases the test is rejected at
10% level. Significance is only slightly more prominent for the other two Australian States.
In a few isolated cases (without any consistent pattern) the randomness tests are rejected at
the 5% significant level for Victorian and Queensland cases. Given the large number of tests
conducted, this few rejections are likely due to Type I errors.

5 Peer effects
5.1 Model specification

We have a panel of commissioners over 15 years with multiple cases and decisions for each
commissioner per year. We assume that the decisions of the commissioners are determined by
the characteristics of the cases, of thedisputing parties, and of the commissioners themselves.
The outcome of the ith case (i = 1, ..., Njtp ) in year t(t = 1, ...T ) judged by commissioner
j(j = 1..., Jtp ) of panel p(p = 1, ..., P ). Yijtp ∈ {0,1} (with Yijtp =1 indicating that the
employee wins the case), is characterized by the following linear probability model:

Qt
X R
X
0 0 0
Yijtp = α + ρ wqjt EYqtp + Xijtp β + ztp γ + {Dtr δr + (Dtr × sj )η} + µi + ijtp (1)
q=1 r=1

10
 where: EYqtp is the expected decision of each commissioner except her own q(q = 1, ...Qt )
in the same panel p as the commissioner j in the same year t; Dtr are statutory legal regime
dummies; Xijtp is a vector of case characteristics (including indicators of summary cases,
whether the parties are represented, the economic sector, the skill level of the employee, the
nature of allegations,etc); ztp is a vector of panel characteristics (proportions on the panel
of Labour appointees, former union officers, and former employer association members); sj is
the commissioners’ party affiliation (an observed characteristics: whether the commissioner
herself is a Labour appointee); µi is a vector of commissioners’ unobserved characteristics;
and ijtp is an idiosyncratic error term which is uncorrelated with the explanatory variables,
x, z, D, s,and the unobserved commissioner fixed-effect µi . The interaction term between
the regimes (D) and commissioners’ party affiliation sj are to allow for the possibility that
commissioners may behave differently under different regimes. wqjt are weights with wqjt = 0
if q is not in the same panel as j or q is j herself, and are row-standardised.
The coefficient of the spatial lag of the expected decisions, ρ, captures the impact of the
behaviour of the panel, i.e., the endogenous peer effect if there is any. If ρ is non zero, it
would imply the presence of interdependence across commissioners.
The impact of the regimes, the characteristics of the commissioners, and the panel are
captured by the parameters β, γ, η and δ. . In particular, the impacts of the characteristics
of the panel reflects an exogenous peer effects (see Manski 1993). It is worth to note though,
that if there exists peer effects, that is, if ρ is not zero, marginal impacts of the explanatory
variables could not be read out directly from the parameters. This is because, through
interdependence among the commissioners, factor impacts would be the result of a complex
reflection process, and the marginal effects of the factors will not be constant anymore. In
such cases, marginal impacts need to be calculated for each individual (see discussions and
summary measures in ?).
This model is otherwise similar to a standard fixed-effect spatial autoregressive model
0
(SAR) if, 1) the term wqjt EYqtp which is the ‘spatial’ lag footnote6 of the expected dependent
variable were replaced by that of the dependent variable itself; and 2) the weights were
0
constant over time—that is, wqjt = w0 for all t. It seems to us that what affects commissioners
are the patterns of characteristics of their fellow judges, not the individual cases—that is,
the commissioners take the expectation of the other commissioners’ decisions as given. As
we observe multiple observations (cases) per individual commissioner per year, we use the
average of each commissioners’ decisions in each year as the proxy of EY , the expectation
term.
In an influential work, ? argues that most empirical estimates of peer effects from econo-
metric studies are spurious, but not necessary causal. We share similar concern if the group
average were used to capture the influence of peers and if it was cross-section data, although
we are less pessimistic (like ?). Our specification, however, makes this issue less a concern.
This is because our data provides much richer information on each peer. Firstly, the term
EYqtp is the average decision of the commissioner q of the same panel p in the same year t.
In other words, unlike in the traditional models, this term represent the decision pattern of
the peer, which is based upon multiple decisions, rather than their single decision. Secondly,
thanks to the panel data, we are able to control for individual heterogeneity.
6
We borrow this term from the literature of spatial econometrics: it means the weighted average of the
values of the dependent variable from observations ‘other than own’.

11
 Since this is an unbalanced panel, the weighting matrices are different for each year.

5.2 Estimation
To identify the parameters of the model, two potential endogeneity problems need to be
dealt with. The first issue is the omitted variable problem. For example, the explanatory
variables could be correlated with some unobserved characteristics of the commissioners. In
this case, OLS estimators will be inconsistent. Since we observe multiple observations for
each commissioner, as long as the correlation is with the time-invariant unobservables, this
issue could be taken care of by including commissioner fixed effects in the model.
The second issue is Manski’s reflection problem. In the standard SAR models, the spatial
lag of the dependent variable is endogenous. This is because if the behaviours of the commis-
sioners affect each other, the influence would be in both directions. In this case, the spatial lag
of the dependent variable will be correlated with the error term. Without proper treatment
of this endogeneity issue, the parameters of the model will not be identified. In our model,
this endogeneity issue may be less severe. If what affects commissioners are the patterns of
their fellow judges, not the individual cases so that the influence of each individual decision
on the expected decision of other commissioners is small enough, then the reflection problem
may be negligible. If this is the case, after controlling for individual fixed-effects (µj ), the
model could be consistently estimated with OLS. In case that the reflection effect is so strong
that it cannot be ignored, even with the spatial lag of expected dependent variable in place,
instrumental IV (or GMM) approach can be used to estimate the model consistently.
To be specific, to eliminate the individual effect, Equation [1] is transformed into
R
X
0 0 e r δr + (DS
gr )η} + e
Yeijtp = ρWg
EY qtp + Xijtp β + ztp γ+ {D t ijtp (2)
r=1

where the transformed variables are the original variables taking away their means for
Qt
0
P
each individual commissioner j. For example, Yijtp = Yijtp − Y j , W EY ≡
e wqjt EYqtp and
q=1
DS r = Dtr × sj .Firstly, we estimate Equation [2] with OLS. As mentioned above,if, as we
suspected, the correlation between the spatial lag of the expected commissioner decisions and
the error term is indeed negligible, the OLS estimator will be consistent. This estimator is the
standard with-in estimator. Secondly, we also estimate Equation [3] with 2SLS using spatial
lags of the other explanatory variables as IV. We will compare the results with those from
the OLS. If the endogeneity is still present, the results from OLS will be inconsistent and
are different from those of 2SLS which are consistent. On the other hand, if the two sets of
results are similar, OLS will be preferred as it is more efficient. We follow similar procedures
as ?. We call this estimator the 2SLS With-in estimator. Thirdly, since we observe multiple
observations for each individual commissioner in each year, we are able to estimate the model
with a 3SLS approach, which can provide consistent estimates for the coefficients of the
case-varying variables (X) even if they are correlated with time-varying unobservables and
if the spatial lags of the expected dependent variable is endogenous. In the first stage, by
taking away the individual means of the commissioners in each year, Equation [3] could be
transformed into:

12
 Yijtp − Y .jtp = (Xijtp − X .jtp )0 β + (ijtp − .ijtp ) (3)
where Y .jtp is the mean of the decision variable given j and t.
It is clear that all the variables that are invariant with the cases dropped out of the model.
Thus, using OLS, consistent estimates of βs, denoted as βbols s, can be obtained. Using these
estimates, Equation [3] could be re-written as
R
X
0 0 e r δr + (DS
gr )η} + e
Yeijtp − Xijtp βbols = ρWg
EY qtp + ztp γ+ {D t ijtp (4)
r=1

Using the same 2SLS on this equation, we can obtain consistent estimates for the other
parameters. We call this estimator the 3SLS With-in estimator.

5.3 Results
In Table 4, we report the results from these alternative models (With-in 2SLS, With-in, and
3SLS With-in estimators) mentioned above. First and foremost, we observe that the majority
of the parameter estimates are remarkable similar, which implies that the simple With-in
estimator does a good job. It also implies that the potential reflection problem is not causing
a problem. We conducted a Hausman test to compare the similarity between the simple with-
in estimates and the with-in 2SLS. With a test statistic of 0.496, the null hypothesis that the
two set of estimates are the same cannot be rejected statistic is 0.496 (for the degree of freedom
16, the critical value at the 5 per cent level is 14.07). The reason seems to be that unlike in
the usual spatial models, we are able to observe the pattern of other commissioners’ behaviour
(rather than a single decision) faced by each commissioner. Thus, the reflection problem is
at least much less of a concern. Secondly, the estimates of the coefficient of the spatial lag
ρ is not significant. This implies that the commissioners’ decisions are not affected by those
of their fellow commissioners. In this case, the coefficients are the measures of the marginal
effects for each of the variables. However, we do find some evidence that the composition
of the panel affects commissioners’ decisions. We find that the proportion of former union
members on the panel has a positive impact on commissioners’ decisions. In particular, if the
proportion of former union members on the panel was increased by 100-percentage points,
the likelihood that the commissioner awards the case to the employee would increase by 24
percent. This effect is significant at the 10 per cent level. This implies that although we did
not find any evidence of endogenous peer effects, we do nonetheless find evidence of exogenous
peer effects. Among secondary findings we observe that most of the other coefficients are also
consistent and comparable with the findings of our previous study ?. For example, judicial
decisions are strongly influenced by case characteristics. An employee’s chance of winning is
about 15 per cent higher if her main allegation was procedural unfairness and about 9 per
cent higher for every additional allegation she may have. Meanwhile, employers were 16 to
18 per cent more likely to be awarded the case if they had professional representatives or
if they gave out very specific reasons for the dismissal. These findings are not surprising in
that the chance of winning is always higher when the party has a stronger case. A party
would probably only hire a representative when confident of a positive payoff in court. In
addition, legal professionals are probably better able to predict the cases than litigants are

13
and therefore to narrow the hiring party’s prediction errors. Thus prediction capacity differs
among the parties, and those who can hire legal professionals are in a better position to
succeed. If the cases are pronounced to be ‘summary dismissal’ (about one fifth of all cases)
then the probability of employee success in courts is significantly improved. This may be a
consequence of ‘heated’ dismissal situations in which the employer forces the employees to
leave the premises forthwith but with insufficient attention dedicated to substantiating the
reason for the dismissal, or at least justifying why mandated procedures could not be followed
in those cases. Note that it is unclear from the documented transcripts whether summary
dismissal is identified by the judge or by the parties, but it is reasonable to assume that the
judge identifies a dismissal as summary based on information provided by the parties (there
is no evidence in the transcripts of the parties arguing about the summary nature of the
dismissal). We do find some difference in the impacts of the regimes relative to the results in
the previous sections. For example, while similar to our earlier findings, we find it was much
less likely that commissioners awarded cases to employees under the WCH regime compared
to the benchmark WRA regime. We also find that commissioners would also award the cases
significantly less often under FWA in this paper. And, the interaction terms of labour party
appointees and the regimes are not significant.

6 Conclusions
We used a panel of Australian labour court judges arbitrating a large number of unfair dis-
missal disputes over a decade and a half to test for the presence of peer effects in their
decisions. Using a spatial econometrics approach, we found no evidence of endogenous inter-
actions: peer behaviour does not influence individual decisions. However, we found significant
exogenous interactions: peers’ characteristics influence individual decisions. It would seem
then that individual judges in Australian Labour courts are not influenced by what their peers
do but instead by who their peers are. For instance, if a peer group is mostly constituted of
individuals having previously worked for employer associations the decisions of an individual
judge in that group will tend to be more employer-friendly regardless of whether the indi-
vidual has worked for employer associations in the past. Our empirical analysis therefore
further supports our initial conjecture (and that of our prior research) that there is significant
political activism in Australia’s labour court: the frequency with which judges rule in favour
of dismissed employees is significantly affected by factors unrelated to the intrinsic facts of
the cases, and these factors are partially reinforced by peer effects.
That political motivations affect outcomes of unfair dismissal cases through nomination
bias in the procedures for court appointment is not necessarily a straightforward proposition.
Judges are afforded work conditions such as life tenure and salary guarantee that signifi-
cantly reduce the opportunity cost of making decisions that ignore political parties’ agendas.
Nonetheless we contend that in ideologically charged regulatory contexts such as dismissal
law where judges interpret rather than make the law and where legal standards (such as the
‘balance of probabilities’ norm) are relatively weak, judicial processes will regularly rest on
the social values of the judge. To the extent that judges’ true ideological stances are signalled
to- and observed by political parties prior to appointment, the correlation between political
motivation and judicial rulings would then emerges from changes in the composition of courts.
Our empirical analysis in this paper suggests that these effects also entail a contagion effect

14
whereby judges who do not hold the same social values of the majority of judges in their
jurisdiction (or who hold no particular social value at all) nevertheless end up taking into
account the social values of their peers when making a decision.
Our findings inform policy-makers, such as those who commissioned and implemented Aus-
tralia’s recent Workplace Relations Framework Review, or researchers such as ? who advocate
for independent appointment processes that amending nomination rules for appointment to
labour courts may indeed succeed in rooting out activism among court members. If activism
reproduces through exogenous peer effects, designing rules that promote the appointment of
politically non-aligned judges should be expected over time to reduce the incidence of political
activism in labour courts through composition effects.

7 Bibliography

15
Tables
Table 1. Workers’s success rate by year and institution
Year All WRA WCH FWA
2000 .410(78) .410(78)
2001 .506(172) .506(172)
2002 .455(132) .455(132)
2003 .380**(153) .380**(153)
2004 .364**(106) .364**(107)
2005 .436(76) .436**(76)
2006 .391*(64) .560(25) .282**(39)
2007 .338**(65) .344**(64)
2008 .278**(79) .273**(77)
2009 .401**(147) .286**(35) .438(112)
2010 .412**(226) .412**(226)
2011 .374**(235) .374**(235)
2012 .373**(241) .373**(241)
2013 .346**(295) .346**(295)
2014 .408**(120) .408**(120)
Total .394**(2,209) .440**(762) .298**(215) .383**(1,232)
* significantly different from .5 at 10% level; ** significantly
different from .5 at 5% level. In parentheses are the number
of cases. A small number of cases are excluded for
this purpose as they are in years with too
small a number of cases.

16
Table 2. Definitions of variables
Award Dummy, 1 if the employee wins.
Most skilled Dummy, 1 if the employee is in the most skilled category
according to ANZCOSKI.
Manufacture Dummy, 1 if the employee is in a manufactural sector.
NSW Dummy, 1 if the case is in New South Wales.
NT Dummy, 1 if the case is in Northern Territory.
QLD&NT Dummy, 1 if the case is in Queensland or Northern Territory.
SA Dummy, 1 if the case is in South Australia.
VIC&TAS Dummy, 1 if the case is in Victoria or Tasmania.
WA Dummy, 1 if the case is in Western Australia.
Employee represented Dummy, 1 if the employee has a representative
Employer represented Dummy, 1 if the employer has a representative
1st allegation employee: procedure Dummy, 1 if the employee’s major allegation is on
procedural unfairness rather than substance.
1st allegation employer: specified Dummy, 1 if the employer’s major allegation is on specific
facts, such as major misconduct, end of probation, etc.
No of allegations by employee the number of allegations made by the employee.
Summary dismissal Dummy, 1 if the case is a summary dismissal case
FWA Dummy for legislation regime: Fair work Australia
WCH Dummy for regulation regime: Work Choice
WRA Dummy for regulation regime: Workplace Relations
Labour appointees the commissioner is appointed by a Labour government
Former Union officer the commissioner is a former union officer
Employer association members the commissioner is a former employer association member

17
Table 3. Sample statistics
All WRA WCH FWA
award .397 .442 .295 .387
Most skilled .221 .184 .198 .248
Manufacture .181 .230 .203 .147
NSW .308 .282 .449 .301
QLD& NT .128 .079 .097 .167
SA .068 .042 .024 .093
VIC& TAS .407 .538 .358 .325
WA .088 .043 .073 .114
Employee represented .708 .890 .754 .583
Employer represented .792 .886 .871 .719
1st allegation employee: procedure .206 .217 .073 .224
1st allegation employer: specified .332 .210 .239 .333
No of allegations by employee 1.689 1.490 1.821 1.793
Summary cases .225 .210 .232 .237
No of commissioners 80 50 37 62
Proportion of Labour appointees .636 .657 .553 .639
Proportion of former union members .392 .365 .294 .396
Proportion of former employer association members .355 .280 .394 .427
No. of cases 2,151 762 207 1,167

18
Table 4. Estimation results (dependent variable: commissioner’s decision
With-in 2SLS With-in 3SLS With-in
ρ 0.019 -0.193 -0.089
(0.13) (0.27) (0.23)
Summary cases 0.144** 0.144** 0.157**
(0.02) (0.02) (0.02)
No of allegations by employee 0.086** 0.085** 0.088**
(0.01) (0.01) (0.01)
FWA -0.127** -0.124** -0.123**
(0.05) (0.05) (0.05)
WCH -0.173** -0.171** -0.177**
(0.06) (0.06) (0.06)
Employee represented 0.133** 0.134** 0.147**
(0.02) (0.02) (0.02)
Employer represented -0.176** -0.177** -0.165**
(0.03) (0.03) (0.02)
Manufacture -0.019 -0.020 -0.033
(0.03) (0.03) (0.02)
Skill level 1 -0.012 -0.011 -0.011
(0.02) (0.02) (0.02)
1st allegation employee: procedure 0.154** 0.154** 0.149**
(0.02) (0.02) (0.02)
1st allegation employer: specified -0.162** -0.162** -0.168**
(0.02) (0.02) (0.02)
Labour appointee×FWA 0.022 0.021 0.016
(0.06) (0.06) (0.06)
Labour appointee×WCH 0.091 0.091 0.091
(0.07) (0.07) (0.07)
Proportion of Labour appointees on the panel -0.152 -0.163 -0.146
(0.10) (0.10) (0.10)
Proportion of former union members on the panel 0.240* 0.243* 0.222*
(0.13) (0.13) (0.13)
Proportion of former employer association members on the panel 0.068 0.065 0.067
(0.10) (0.10) (0.10)
OBS. 2,151
Reference groups: the regime of WRA, less skilled, other sectors, and commissioners who
had no affiliation with union or employer association.
Standard errors are in parentheses. ** Significant at 5% level; * Significant at 10% level.

References

19