NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Great Expectations: Law, Employment Contracts, and Labor Market Performance

W. Bentley MacLeod

NBER Working Paper No. 16048
Issued in June 2010
NBER Program(s):   LE   LS

This chapter reviews the literature on employment and labor law. The goal of the review is to understand why every jurisdiction in the world has extensive employment law, particularly employment protection law, while most economic analysis of the law suggests that less employment protection would enhance welfare. The review has three parts. The first part discusses the structure of the common law and the evolution of employment protection law. The second part discusses the economic theory of contract. Finally, the empirical literature on employment and labor law is reviewed. I conclude that many aspects of employment law are consistent with the economic theory of contract - namely, that contracts are written and enforced to enhance ex ante match efficiency in the presence of asymmetric information and relationship specific investments. In contrast, empirical labor market research focuses upon ex post match efficiency in the face of an exogenous productivity shock. Hence, in order to understand the form and structure of existing employment law we need better empirical tools to assess the ex ante benefits of employment contracts.

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This paper was revised on December 5, 2011

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Document Object Identifier (DOI): 10.3386/w16048

Published: Great Expectations: Law, Employment Contracts, and Labor Market Per- formance, in Handbook of Labor Economics, Vol 4, edited by O. Ashenfel- ter and D. Card, 2011, pp 1591-1696.

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