Edited by Matthew W. Finkin and Guy Mundlak
Chapter 2: Comparative labor and employment law in developed market economies: Fostering market efficiencies or repairing market failures?
Labor and employment law plays a central role in modern developed economies. In this chapter, we start by reviewing the economic approach to labor markets and their failures and the different theories explaining the role and importance of labor law. We then turn our attention to the legal origins theory by which economists claim to explain differences in labor and employment law across the world. Our critical review of the legal origins theory leads us to a discussion of specific aspects of labor law in common law and in civil law jurisdictions from the perspective of the ‘varieties of capitalism’ approach. We conclude by suggesting that the latter could provide a more solid explanation of distinct labor law approaches than the legal origins theory. On the neoclassical view of labor markets, a perfectly competitive market (for, say, machinists in a particular region) would yield a single wage level, corresponding to the marginal productivity of labor, at which the demand for labor equaled the supply. Both workers and employers would be ‘price-takers’ at this equilibrium wage; workers who demanded more would not find a job, and employers who offered less would not find workers. In this hypothetical perfectly competitive market, regulations that raised the price of labor above the equilibrium wage, either directly or indirectly, would result in an inefficient mismatch between demand and supply in the form of unemployment. No one, including neoclassical labor economists, believes that labor markets are actually perfectly competitive.
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