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

W. Bentley MacLeod

NBER Working Paper No. 16048
Issued in June 2010, Revised in December 2011
NBER Program(s):Law and Economics, Labor Studies

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.

download in pdf format
   (566 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

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.

Users who downloaded this paper also downloaded* these:
Kornhauser and MacLeod w16049 Contracts between Legal Persons
Oyer and Schaefer w15977 Personnel Economics: Hiring and Incentives
Acemoglu and Autor w16082 Skills, Tasks and Technologies: Implications for Employment and Earnings
List and Rasul w16062 Field Experiments in Labor Economics
Rogerson and Shimer w15901 Search in Macroeconomic Models of the Labor Market
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us