Modernisation or Evolution?
3. The economics of employment regulation 3.1 INTRODUCTION There are three main theories attempting to explain the nature and evolution of employment law (Botero et al., 2003). According to the legal theory, a country’s approach to regulation reflects its legal tradition. Thus in countries where common law dominates, the emphasis is placed upon contracts and private litigation, whilst in most civil law countries direct supervision is relied upon to address failures in the functioning of the labour market. Under the political power theory, it is the governing party and their voters who design regulations to suit their own interests and redistribute power and wealth from their opponents. In this chapter, whilst we recognise the relevance of these two approaches to understanding the evolution of European social policy, we concentrate upon a third approach: the efficiency theory. This approach argues that institutions evolve to provide the most efficient regulation of the employment relation. Each society, it argues, chooses that combination of regulation, litigation and corrective taxes and subsidies that best suits its aspirations and economic environment. The key economic function of the labour market is to generate a match between workers and jobs, a match that maximises the level of output for the minimum amount of working time and effort. Due to the failures in the working of market forces and equity considerations, a set of institutions are required to mediate or condition the behaviour of agents to facilitate the achievement of this function. These labour institutions include social norms, collective...
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