The Regulation of Labor

"Patterns of regulation across countries are shaped by their legal structures, most of which are adaptations of Europe's common and civil law traditions."

In The Regulation of Labor (NBER Working Paper No. 9756), Juan Botero, Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer examine employment law, industrial and collective relations law, and social security law in 85 countries to determine how nations regulate the conditions of workers and to assess the consequences of such regulation. For purposes of their study, the researchers configure a "standardized" male worker who is a non-executive, full-time employee with 20 years of service at the same firm and whose salary plus benefits equal his country's GNP per worker over the period. He has a non-working wife and two children, and they live in the country's largest city. He is a lawful citizen and shares the racial and religious characteristics of the majority of his countrymen. Unless membership is required, he does not belong to a union. He enjoys good health, vacation and retirement benefits, and works a standard workweek. To complete the picture, the authors also construct a standardized employer: a locally owned factory that provides its 201 employees with all benefits as mandated.

The central labor regulations that the authors consider govern employment contracts, collective bargaining and enforcement of bargaining agreements, and industrial action by workers and employers. Using data they have assembled from national laws for 85 countries, the researchers examine the effects of per capita income, legal origin, and leftist political power on the regulation of labor. They also consider some of the consequences of labor regulation, such as the size of a country's unofficial economy, male and female participation in the labor force, unemployment rates, and relative wages of protected and unprotected workers.

The authors conclude that patterns of labor regulation are inconsistent with the efficiency theory, which predicts that heavier regulation of labor markets should be associated with better labor outcomes. The data indicate, for example, that labor regulation raises unemployment, and reduces labor force participation. The evidence is also inconsistent with standard political theory, which sees heavier regulation of labor as a reflection of the political power of the left, residing either in government or in unions. In contrast, the evidence is generally consistent with the legal theory, which holds that patterns of regulation across countries are shaped by their legal structures, most of which are adaptations of Europe's common and civil law traditions.

The authors note that their results do not suggest that efficiency forces in regulation should be totally discounted; nor do the results mean that politics are unimportant. For example, employment protection and industrial relations laws appear to affect different classes of workers differently, and this may well create a basis of political support for the politicians who expand such laws. Older workers, and those more likely to be covered by the laws, are the likely beneficiaries of labor regulations and therefore are likely to support them politically. But politics, the research shows, remain secondary to the historical origin of a country's laws in determining a country's regulatory style.

Finally, the researchers point out that a key result in their study is the high correlation among measures of regulation of various activities across countries: for example, nations that regulate business entry also regulate labor markets and judicial proceedings. Central to this conclusion is what they call institutional transplantation: countries have regulatory styles that are pervasive across activities and are shaped by the origin of their laws.

-- Matt Nesvisky

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