AN ECONOMIC AND LEGAL APPROACH TO LABOUR LAWS

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This article was written by Monalisa Sarkar, a student of WBNUJS.

In the age of gig economy, employment relationship has constantly been subjected to various criticisms, the key issues being- exploitation of workers, the degree of mandate and classification of labours based on law[1]. In my paper, through an interdisciplinary approach I will be analysing how labour laws and unemployment share an inconsistent relationship, along with the various positive and negative outcomes based on varied market situations[2]. Through the course of this paper, I will be taking a neutral standpoint while criticizing the facets associated with the economic and legal context.

INTRODUCTION:

Legal protection of workers has been argued to be helpful in alleviating inequality and bargaining power which has always been an intrinsic part of employer-employee relationship[3], the entire argument being based on the assumption that, the labour market works in a unique equilibrium. The present labour laws contradictorily disrupt the competitive processes and market outcomes, and thus often end up harming the workers[4].

FACETS OF THE ECONOMIC AND LEGAL PERSPECTIVE:

Economic literature assumes that employment reduction is caused by the existing market equilibrium, where an artificial wage floor decreases demand of the employee, thereby resulting in wage protection having a dual effect[5]. On the other hand, where the matter concerns a monopsonist or an imbalance of statistics between employer and employees, there can be positive outcomes of minimum wage law implementation. In this setting, the minimum wage floor can inflate both wage and employment[6].

Ex ante, the labour power of a worker is sold to an employer, consideration being an agreed wage. Ex post, the employer is bestowed with controlling rights and residual income[7]. Owing to the limitation of bargaining power, norms supplement the legal agreement in building trust among the parties by balancing fairness and productivity[8].

Contractual results can be improved by offering job security[9]. Adverse selection procedures could act as a restrain whereas free-riding may result in training being under-provisioned[10]. Standards establishing the conditions for termination of employment and training requirements serve as instruments for curbing mutual problems linked to employer’s ineffectiveness to suit methodical rules[11]. Binding legal rules could prove to be non-adjustable in some contexts, barring a few exceptions e.g. minimum wage laws specifying basic rates of pay.

Labour law has both procedural and substantive aspects attached to it e.g. worker representation laws laying down the structure for industrial relations lack distributive results specification, concluding that, labour laws are in the form of Coasean terms which increase trade profits by cost-reduction, thus expanding the avenue for contractual concord[12]. However, the aligning coherent nature of organisation and integrity of such laws should not be deemed to entail that worker security is consistent everywhere. Labour laws fragment compilation of distinct market imperfection such as monoponsy or adverse selection[13], thereby implying that active regulatory involvement is considered to be less appealing over legal abstention[14].

Keeping these perspectives in mind, it should also be considered that labour laws hold a strong ground. Even in the absence of such rules, contracts and property law rules forming the skeleton of basic exchange would by default make the employment relationship subjected to law[15].

While it is argued that labour law should not interfere in employment relationship, private laws favouring employer should also be taken into account. The notion that worker-protective regulations function on distinct methodical equilibrium should be curbed from labour law model based on empirical grounds[16].

From a micro-level viewpoint, employment relationship is seen to be based on norms which when viewed from a macro-level perspective, impact distributive results along with productivity of resource allocation. Amendments effect similar selection among varied feasible equilibria, with each representing a specific equality and coherent conjunctive outcome. Some of them relating to trade-offs between equity gains and productivity, while others being involved with capital dispensation involving more productive and just measures than other viable means[17].

Alternative employment contracts regulatory laws can prove to be helpful in making inequitable dismissal prevention laws supple, thus enabling employers to use their resources in a more cost effective way by avoiding the pervasive standard of permanent and full-time work. Although in the course of creating apportionment of divergent and prevalent employment standards, this may also create new inflexibilities. The new forms of employment contracts involve narrowing down of training and lowers human capital investment, thus making it unclear that whether the active involvement of the legal system will prove to be economically benefitting[18].

Codetermination or laws involving employers directing representation of employees have a similar operational approach towards employment protection laws which further help in incentivising reciprocal investment by employers[19].

These kinds of laws are best suited for well-constructed corporate ownership title with employer’s job security affirmation where it is difficult for shareholders to exit the firm or remove assets “through merger or takeover” which act as incentive. Empirical studies have suggested that even with reasonable liquid market capitals, worker dismissal protection laws can increase innovation which is similar to patents, high-tech-start-ups and number of employees appointed[20].

 The legal constrain on the employer’s dismissal power will act as an incentive for workers in coming up with new innovations and processes since they will no longer be exposed to employer’s free will. This may encourage workers and shareholders towards coherent rent-allocation. Labour laws and associated labour-market institutions do not attach much ambiguity to their distributional effects which include collective worker instrumentation along with determination of wage. In developed countries, earning inequalities have been greatly reduced by collective bargain[21].

With centralised collective bargain and wage indexation laws, pay distribution is lower whereas decentralised wage discrimination promotes reduction of pay distribution[22].

Adjustment in the relation between labour allocation and time connote the consistency (or inconsistency) between the labour wages and the increase in national capital, one of its drawbacks being non-consideration of unequal wage-rate amongst varied labour forces. Analysis of data starting from the early 1970s shows that, there has been a consistent decline in the labour share in countries like France, Sweden, the United Kingdom and the United States.  Germany retained a considerable balance until 2000, after while there was a gradual decline. Japan was one of the countries with least labour share, yet proved to be the most stable (around 55 per cent)[23].

The short run inducement effect could be seen both in terms of hiring and dispensation. However, the consequences are adjusted by adapting to the new behavioural pattern in adherence to the emerging legal domain. This would however be prone to makeshift disturbances. For example, new laws devised for work-time protection of labours could result in unemployment as firms react negatively to legal changes. However, the long-term effect could prove to be beneficial through increased investment in human capital concerning investment particular to private sectors. This expected result could not however lead to any long term effect relating to regressive scrutiny[24].

Legal changes could also bring about stability in the economic equilibrium, which could be a key factor in controlling the demand in labour market. Thereby, shifting the trend of investment from an equilibrium concerning lower employment skills and wage rate, to an equilibrium involving higher level of technologies leading to reciprocal investment schemes. These shifts would subsequently exhibit a long term impact on regression exploration. In either situations i.e., long-term and short-term, other factors share commensurate gravity[25].

The widely accepted methods of panel-data analysis which include specific culmination, influential variables and GMM (general method of moments) have proved to fabricate paradoxical and ambiguous outcomes concerning panel data models, unless the coefficients share homogeneous slopes. The standard procedure to come up with the required outcome is by using a vector error correction methodology whereby slight differences in variables can be taken into consideration[26].

CONCLUSION:

A detailed analysis of the available data shows that there has been no evidence of any orderly correspondence between the concerned labour laws and the reason stimulating unemployment in developed nations, yet there remains a possibility of some labour laws having a negative effect over employment relationships, the effect being the probable result of agreements concerning work allocation and employment efficiency. Where the matter pertains to ‘Worker Representation Laws,’ it could lead to an increase in employment incitement and spirit thereby leading to positive outcomes[27].

From a reciprocal approach, labour protection laws could have various counterbalancing consequences which include limited hiring by firms along with cost incompetent dismissals[28].

Laws regulating employment relations can have diverse effects over employment relations concerning input approach in general and human resource allocation in particular, thereby requiring further improvization based on firm-specific information regarding econometric evaluation[29].

 Depending on the situation, these laws can have contradicting effects. Distributive repercussions often being positive are always limited to being dependant on the context. This viewpoint therefore requires empirical evidence in establishing the extent to which labour laws can be influential[30], thereby seeking further clarification with respect to the economic and legal context.

[1] Paul Oyer, Labour and Employment Issues In The Gig Economy, Analysing Group (Apr. 2017, 08:37 PM), http://www.analysisgroup.com/labor-and-employment-issues-in-the-gig-economy/.

[2] Simon Deakin et al, How Do Labour Laws Affect Unemployment and The Labour Share of National Income? The Experience of Six OECD Countries, 153 Int. Labour Rev 2, 3 (2014). 

[3] Alain Supiot, The Spirit Of Philadelphia: Social Justice Vs. The Total Market, at 327 (2012).

⁴This has been stated in the economic critique given by the World Bank, http://www.doingbusiness.org/reports/global-reports/doing-business-2008/.

[5] David Neumark & William L. Wascer, Minimum Wages 227 (2013).

[6] David Card & Alan B. Krueger, Myth and Measurement: The New Economics of Minimum Wage Rate 105 (1995).

[7] Simon Deakin et al, How Do Labour Laws Affect Unemployment and The Labour Share of National Income? The Experience of Six OECD Countries, 153 Int. Labour Rev 2, 2 (2014). 

[8] Bjorn Bartling et al, Use and Abuse of Authority: A Behavioual Foundation of The Employment Relation, 11 J. Eur. Econ. Assoc 711, 711 (2013).

[9] Jeremy I. Bulow & Lawrence H. Summers, A Theory of Dual LabourMarket with Application To Industrial Policy, Discrimination and Keynesian Unemployment, 4 J. Labour Econ 376, 376 (1986).

[10] Daron Acemoglu & Jörn-Steffen Pischke, Beyond Becker: Training In Imperfect Labour Markets, 109 Econ. J. 112, 112 (1999).

[11]  Christopher Arup et al, Labour Law and Labour Market Regulation: Essays On The Construction, Constitution and Regulation of Labour Markets and Work Relationships 43 (2006).

 1² Simon Deakin et al, How Do Labour Laws Affect Unemployment and The Labour Share of National Income? The Experience of Six OECD Countries, 153 Int. Labour Rev 2, 3 (2014). 

[13] kenneth g. dau-schidt et al, Labour and Employment Law and Economics 75 (2009).

[14] Guiseppe Bertola, Labour market Regulation: Motives, Measures, Effects, International Labour Organisation (2009,07:49PM), https://iris.unito.it/retrieve/handle/2318/1512540/45674/wcms_travail_pub_20.pdf.

[15] Simon Deakin & Frank Wilkinson, The Law of The Labour Market: Industrialization, Employment, and Legal Evolution 25 (2005).

[16] Simon Deakin et al, How Do Labour Laws Affect Unemployment and The Labour Share of National Income? The Experience of Six OECD Countries, 153 Int. Labour Rev 2, 4 (2014).

[17] Simon Deakin et al, How Do Labour Laws Affect Unemployment and The Labour Share of National Income? The Experience of Six OECD Countries, 153 Int. Labour Rev 2, 4 (2014). 

[18] Simon Deakin, Addressing Labour Market Segmentation: The Role of Labour Law, International Labour Organisatioin (Oct. 9, 2013, 04:38 PM), http://www.ilo.org/wcmsp5/groups/public/—ed_dialogue/—dialogue/documents/publication/wcms_223702.pdf.

[19]  Uwe Jirjahn et al, Works Councils and Learning: On The Dynamic Dimension of Codetermination, 64 Kyklos 427, 427-447 (2011).

[20] Viral V. Acharya et al, Labour Law and Innovation, The National Bureau of Economic Research (Oct. 2010, 05:30 PM), http://www.nber.org/papers/w16484.

[21] Richard B. Freeman, Labour Market Institutions Without Blinders: The Debate Over Flexibility and Labour Market Performance, 19 Int Econ J. 129, 129-145 (2005).

[22] Marco Manacorda, Can The Scala Mobile Explain The Fall and Rise of Earnings Inequality In Italy? A SemiparametricAnalysis, 1977-1993, 22 J. Labour. Econ. 585, 585-613 (2004).

[23] Simon Deakin et al, How Do Labour Laws Affect Unemployment and The Labour Share of National Income? The Experience of Six OECD Countries, 153 Int. Labour Rev 2, 2 (2014). 

[24] Simon Deakin et al, How Do Labour Laws Affect Unemployment and The Labour Share of National Income? The Experience of Six OECD Countries, 153 Int. Labour Rev 2, 2 (2014). 

[25] M. Hashem Pesaran et al, Pooled Mean Group Estimation of Dynamic Heterogeneous Panels, 94 J Am Stat Assoc 621, 622 (1999).

[26] M. Hashem Pesaran et al, Pooled Mean Group Estimation of Dynamic Heterogeneous Panels, 94 J Am Stat Assoc 621, 622 (1999).

[27] Simon Deakin et al, How Do Labour Laws Affect Unemployment and The Labour Share of National Income? The Experience of Six OECD Countries, 153 Int. Labour Rev 2, 5-6 (2014).

[28] Guiseppe Bertola, Labour market Regulation: Motives, Measures, Effects, International Labour Organisation (2009,07:49PM), https://iris.unito.it/retrieve/handle/2318/1512540/45674/wcms_travail_pub_20.pdf.

[29] Simon Deakin et al, How Do Labour Laws Affect Unemployment and The Labour Share of National Income? The Experience of Six OECD Countries, 153 Int. Labour Rev 2, 5-6 (2014). 

[30] Simon Deakin et al, How Do Labour Laws Affect Unemployment and The Labour Share of National Income? The Experience of Six OECD Countries, 153 Int. Labour Rev 2, 5-6 (2014).