On the Economic Effects of Disobeyed Regulation in Employment Law

Abstract

Mandatory restrictions in employment law, seeking to promote the welfare of workers, are debated fiercely. Proponents argue that they protect workers. Opponents believe that they spawn inefficiency and harm workers. Yet all agree that restrictions trigger such effects only when obeyed. This Article challenges the conviction that the welfare effects of mandatory restrictions depend on obedience. We show experimentally that when restrictions are disobeyed, workers’ reservation wages rise, i. e., workers charge higher wages when offered employment that violates the restrictions. That, in turn, produces welfare effects similar in nature to those produced when restrictions are obeyed. This observation is therefore important to both proponents and opponents of employment regulation. We establish this claim experimentally by measuring the effects of disobeyed restrictions on workers’ reservation wages. We then investigate several hypotheses as to why these effects are generated. Last, we point out that our findings have important implications in other contexts of contractual regulation, such as in the domain of consumer protection.

When the paper tiger bites: Evidence of compliance with unenforced regulation among employers in Sweden

“…Overcoming some of these limitations, this study seeks to fill an important gap in the literature by being one of the first to rigorously evaluate a particularly informative case of regulatory strategy, namely one for which the deterrence mechanism of organizations' compliance is ruled out because the regulation is essentially unenforced (and, arguably, unenforceable). Such regulation is fairly common not least in the labor market realm (see Harel et al 2017), and gained topicality in 2020 as governments worldwide began imposing physical distancing requirements on individuals and organizations to curb the spread of COVID-19in many cases with no credible threat of enforcement (e.g., Witte 2020).…”

“…Such regulation is fairly common not least in the labor market realm (see Harel et al . 2017), and gained topicality in 2020 as governments worldwide began imposing physical distancing requirements on individuals and organizations to curb the spread of COVID‐19 – in many cases with no credible threat of enforcement (e.g., Witte 2020).…”