THE REGULATION OF LABOR

IR242 Bailey

Introduction

Bodies of law: Employment Law Collective Relations Law Social Security Law

Theories of Institutional Choice: Efficiency Theory Political Power Theory Legal Theory

Research Considerations

Noteworthy: What distinguishes this research from previous ones is the combination of a significant

coverage of countries and a comprehensive approach to labor market regulations.

Hypotheses

Q: WHY DO GOVERNMENTS INTERVENE IN THE LABOR MARKET?

Free labor markets are imperfect, as a consequence there are rents in the employment relationship, and employers abuse workers to extract these rents, leading to both unfairness and inefficiency.

Forms of Regulating Labor Markets

Forbid discrimination and give workers with basic rights in the employment relationship

Regulate employment relationship Empower labor unions to represent workers

collectively and protect particular union strategies in negotiations with employers

Provide social insurance against unemployment, old age, disability, sickness and health, or death.

Hypothesis: Efficiency Theory1. If government intervention in the labor

market in the form of worker protection is efficient, then it should not have large adverse consequences, such as unemployment, withdrawal of people from the labor force, and the growth of the unofficial economy.

2. If efficiency is the correct model, political factors such as the power of the left or constraints on government would not shape regulatory choices.

Hypothesis: Political Power Theory1. The principal mode of political decision

making is elections, and that the parties that win them shape laws. Regulations are introduced by socialist, social-

democratic, and leftist governments to benefit their political constituencies.

2. Laws are shaped by the influence of interest groups. Regulations respond to the pressure from

trade unions, and should therefore be more extensive when the unions are more powerful, regardless of which government is in charge.

Hypothesis: Legal Theory

1. Patterns of regulation of labor markets should follow the general styles of social control utilized by each legal system more generally.

2. Common law countries should have a less generous social security system because they are more likely to rely on markets to provide insurance.

3. Patterns of regulation of different activities are correlated across countries.

Measures of Labor Regulation

Alternative employment contracts

Cost of increasing hours worked Cost of firing workers Dismissal procedures

EMPLOYMENT LAWS

Noteworthy: These index of employment laws, reflects the incremental cost to the employer of deviating from a hypothetical rigid contract, in

which the conditions of a job are specified and a worker cannot be fired.

Measures of Labor Regulation

Power granted by the law to labor unions over working conditions

Laws governing collective disputes

COLLECTIVE RELATIONS LAWS

Measures of Labor Regulation

Old age, disability and death Sickness and health Unemployment

SOCIAL SECURITY LAWS

Noteworthy: variables take into account the cost borne by the worker for the privilege of social

security coverage (required months of contribution to qualify for a standard pension or to enjoy

unemployment and sickness benefits) as well as the length of waiting period before receiving benefits

Measures of Labor Regulation

Aggregation - sub-indices for the particular area to

present the correlations between the various sub-indices and indices

Independent Variables- number of potential determinants of labor

regulations, per capita income in 1997, average years of schooling of the population over 25 years of age, politics, union density, political constraints, legal origins of commercial laws, size of the unofficial economy, labor force participation, unemployment, relative wages of protected and unprotected workers.

OTHER FACTS

DATA

PORTUGAL- Allowed only for a

maximum of 3 years, are granted for specific situations, and are temporary in nature.

- Regulates working time and leaves, remuneration, and working conditions

- Premium for overtime is 50% for the first 6hrs per week and 75% for every hour thereafter; 24 paid annual leave; cap of 200hrs of overtime per year

NEW ZEALAND- Fixed term contracts can be

entered for any reason and there is no maximum duration provided by law

- Regulated by collective bargaining or left to the individual employment contract

- No premium for overtime work, no quantitative restrictions on night work, 15days of paid leave.

DATA

PORTUGAL- Minimum notice period and

severance period that may be paid are strictly regulated

- Constitutionally forbidden to dismiss w/o cause

- Public list of fair grounds for termination & stringent procedural limitations on dismissal

- Portuguese Const. guarantees rights to form trade unions & engage in collective bargaining.

NEW ZEALAND- Notice period and

severance pay are not regulated by statute

- Dismissal w/o cause is allowed

- Advance notice is considered as fair reason for termination for redundancy

- No obligation upon the employer to negotiate with the bargaining agent

DATA

PORTUGAL- Right to strike is a mere

freedom- Does not allow employer

lockouts- Requires employers to be

notified before the strike- Social security is regulated- Workers contribute more

and expect their benefits for 10.5years

- Percentage of the previous net wage covered by net benefits is 58%

NEW ZEALAND- Right to strike is a

constitutional right- Allows employer lockouts- Does not mandate a waiting

period or notification before strikes can occur

- Social security is not regulated- Workers contribute less and

expect their benefits for 13.4years

- Percentage of the previous net wage covered by net benefits is 76%

DATA

PORTUGAL- Sickness and health

benefits require 6mos of contributions before benefits can be claimed, 3.17% of the workers monthly pay is deducted to pay for insurance, and there is a waiting period of 3days b/w the time the employee falls ill and payments begin.

- 18mos contribution period for unemployment benefits; no waiting period; benefits received is 77% of net previous wage

NEW ZEALAND- No min. contribution, no

waiting period, and no deduction from pay of workers to cover for insurance.

- No min contribution for unemployment benefits; 70days from the time of firing to when he can claim benefits; benefits received is 25% of net previous wage

Testing the Theories

No evidence that employment laws or collective relations laws vary with the level of economic development Rich countries have generous social security

systems, both as measured by the aggregate index and for old age, health, and unemployment benefits separately.

Legal traditions are important determinants of various aspects of statutory worker protection

Higher union density is associated with stronger worker protection – support political theories which hold that worker protection comes from their political power

Outcomes

More protective collective relations laws are associated with a larger unofficial economy

More protective employment, collective relations, and social security laws lead to lower male (but not female) participation in labor force

More protective employment laws lead to higher unemployment, esp. of the young

More generous social security systems are associated higher relative wages of privileged workers.

Conclusion

Efficiency Theory – difficult to reject but not much support; heavier regulation of labor has adverse consequences for labor force participation and unemployment.

Political Theory - some support for the view that countries with a longer history of leftist governments have more extensive regulation of labor

Legal Theory – strong evidence that the origin of a country’s laws is an important determinant of its regulatory approach, in labor as well as in other markets.