Labor and Employment Lawand Economics

Edited by

Kenneth G. Dau-SchmidtWillard and Margaret Carr Professor of Labor and EmploymentLaw and Co-Director, Center for Law, Society and Culture,Indiana University-Bloomington, Maurer School of Law, USA

Seth D. HarrisProfessor of Law and Director, Labor and Employment LawProgram, New York Law School, USA

Orly LobelProfessor of Law, School of Law, University of San Diego,USA

ENCYCLOPEDIA OF LAW AND ECONOMICS,SECOND EDITION

Edward ElgarCheltenham, UK • Northampton, MA, USA

Contents

List of figures xxiList of tables xxiiList of contributors xxiiiIntroduction xxv

PART I THE ECONOMICS OF REGULATING THELABOR MARKET

1 Labor law and employment regulation: neoclassical andinstitutional perspectives 3Bruce E. Kaufman1 Neoclassical law and economics 5

A Models and assumptions 6Efficient allocation of scarce resources 6Efficiency is defined in terms of consumers' interests 7The efficiency of competitive markets 7Fairness, justice and redistribution 7Personal freedom, initiative and responsibility 8

B Application to labor and employment regulation 9Labor market regulation 10Employment mandates 12

C Market failure 14Imperfect information 14Asymmetric information 15Employer market power 15Externalities and public goods 16Imperfect decision-making 17

D Countervailing arguments against employmentf regulation and mandates 17Market failure: spotty and superficial 18The efficiency of the common law 18Government failure is worse than market failure 18Regulatory capture and rent seeking by special

interests 18The Coase theorem and private bargaining 19Maximum of liberty and freedom of contract 19Empirical evidence 19

vii

viii Labor and employment law and economics

Institutional law and economicsAB

CD

E

FG

People, ideas and historical contextKey IL&E assumptionsPurpose of an economyLibertyLabor is humanOwnership and property rightsInstitutionsSovereigntyBehavioral/social model of the human agentTransactions and transaction costModes of coordinationPowerReasonable valueCritique of the competitive modelLabor's inequality of bargaining powerImperfect competitionUnequal resources and rightsInvoluntary unemployment and destructivecompetitionEfficiency and growthExternalities and social costs of labor

ConclusionHotzraDhv

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PART II GOVERNANCE AND SELF-GOVERNANCE OFEMPLOYMENT RELATIONSHIPS

2 Employment contracts 61Ann-Sophie Vandenberghe1 Introduction 612 Typical features of employment contracts 62

A Employment as a relational contract 62f B Firm-specific human capital 63

C Agency problems 653 Termination rules and consequences of termination 68

A A taxonomy of dismissal doctrines 68(i) At-will termination , 68(ii) Good faith limitation on termination 68(iii) Just cause limitation on termination 69

B The at-will versus just-cause debate 69(i) Administrative costs 70

Contents ix

(ii) Implicit self-enforcing contracts 71(iii) Opportunistic terminations 72(iv) Conclusion 73

C Obligations upon termination 74(i) No damage compensation 74(ii) Notice periods and severance pay 78(iii) Covenants not to compete 81

4 Pre-contractual information problems 83A Pre-contractual information duties ; ' 83B Probation periods v 85C Discriminatory signals 85

5 Other possible failures of individual bargaining 876 Conclusion 88Bibliography 90

Regulating unions and collective bargaining 96Kenneth G. Dau-Schmidt and Arthur R. Traynor1 Introduction 962 Regulations to protect and foster employee organization:

the market for union services 98A The market for union services 98B Government regulation to foster employee

organization 100C The rise and fall of unions in the American private

sector 1013 The impact of unions on equity, efficiency and voice 103

A The monopoly model of unions 103B Other sources of union wage and benefit increases 106C The efficient contract model 110D The median voter model 113

4 Regulating the conduct of collective bargaining andcontract enforcement 114A Models of the bargaining process 114

t(i) Union resistance and employer concessioncurves 115

(ii) Bargaining power 116B Models of strikes 117

(i) Imperfect information , 118(ii) Strategic behavior 119

5 Conclusion 122Bibliography 123

x Labor and employment law and economics

PART III EMPLOYMENT TERMS AND CONDITIONSAND THEIR REGULATION

4 Investments in adult lifelong learning 131Lisa M. Lynch1 Introduction 1312 Theoretical framework 1323 Empirical evidence: returns to post-school human capital

investments ; / 1354 Policy responses: a general framework _. • 1395 Policy responses: specific examples 142

Training levies 142Training funds 142Paid training leave 143Tax rebates and deductions 143Individual training accounts 144

6 Conclusion 145Bibliography 146

5 Minimum wage legislation 150Simon Deakin and Frank Wilkinson1 Introduction 1502 Types of minimum wage legislation 1503 Standard neoclassical theory on minimum wages 1544 Recent empirical evidence: a basis for reassessing

standard theory? 1555 Alternative theoretical perspectives 1576 Dynamic effects of introducing and raising the minimum

wage 1597 The minimum wage, household poverty and work

incentives 1628 Conclusion 166Bibliography 167

6 Health insurance 172David A. Hyman1 Introduction 1722 Factors encouraging employment-based health insurance 1743 Consequences of linking employment and health insurance 1764 Regulation of employment-based health insurance 1775 Employer mandates and ERISA 180Bibliography 181

Contents xi

7 International executive pay: current practices and future trends 183Randall S. Thomas1 Introduction 1832 US pay practices 184

A High pay for performance levels 184B High compensation levels 186

3 CEO pay in other countries 186A Lower levels of performance-based pay than in the US 188B Lower CEO pay outside the US 191C Evidence of compensation convergence- 193

4 Market-oriented drivers of executive pay 196A Evolving share ownership patterns 196

(i) Sweden 197(ii) Germany 197(iii) China 198(iv) India 199(v) Impact of changes to ownership structures on

executive compensation 200B Cross-border hiring 201C Transnational mergers and acquisitions 204D The growth of multinational enterprise 205E Conclusion 207

5 Corporate law and the globalization of executive pay 207A Direct regulation 207B Breach of duty and related causes of action 208C Shareholder voting 210D Restrictions on the distribution of stock to executives 211E Disclosure 212

6 Other legal factors 215A Tax 215B Labor law 216

7 'Soft law' 2178 Culture 2199 Conclusion 222Bibliography 224

8 Workers' compensation 235John F. Burton, Jr1 Introduction 2352 Coverage 237

A Coverage dejure 237(i) Coverage of workers and employers 237

xii Labor and employment law and economics

(ii) Coverage of injuries and diseases 237B Coverage de facto 238

(i) Coverage of workers and employers 238(ii) Coverage of injuries and diseases 239(iii) Who pays for the coverage? 241

3 Safety 243A Trends in workplace safety and health 243B Approaches to workplace safety 244

(i) Tort law 245(ii) Workers' compensation - " 249

C General assessment of safety 2524 Cash benefits 253

A Operational approaches 253B Types of cash benefits 254

(i) Temporary total disability benefits 254(ii) Permanent partial disability benefits 254(iii) Permanent total disability benefits 255(iv) Death benefits 256

C Adequacy 256D Equity 257

(i) Equity for disability ratings 258(ii) Equity for replacement rates 258(iii) Assessments of equity 259

5 Medical care and rehabilitation services 260A Medical benefits in theory 260B Medical benefits in practice 260C Performance studies 261D Policies to improve performance 262E Separate health care systems 263

6 Delivery system 265A Delivery system models 265B Insurance arrangements 266

7 Conclusions 267Bibliography 268

9 Occupational safety and health regulation 275Sidney A. Shapiro1 Introduction 276

A Spillover costs 276B Wage premiums 276C Regulation and efficiency 277

2 Labor markets 278

Contents xiii

A Empirical evidence of wage premiums 278B Adequacy of wage premiums 279C Reform 281

3 Regulation 281A OSHA's mandate 281B Empirical evidence of effectiveness 282C Adequacy of administrative regulation 284

(i) The inefficacy theory 284(ii) Non-compliance theory 285(iii) Overregulation causes underregulation 285

C Reform of standard-setting 286D Reform of enforcement 287

(i) Prosecutorial approach 287(ii) Cooperative model 288

4 Conclusions 291Bibliography 292

10 Employment discrimination 296Stewart J. Schwab1 Scope of law and economics analysis of employment

discrimination 2962 Definitions of discrimination 2963 Economic models of discrimination 299

A Becker's taste for discrimination model 299B Statistical discrimination 303C Sorting model 305D Status-production and other cartel models of

discrimination 3064 The economic role of antidiscrimination laws 3075 Empirical studies of employment discrimination law 3106 Special issues in sex discrimination laws 313Bibliography 317

11 Accommodating families 320Joyce P. Jacobsen1 Introduction 3202 Rationales for intervention 3203 Economic theory 3224 Existing laws and policies 3245 Empirical work 3286 Conclusion 334Bibliography 338

xiv Labor and employment law and economics

12 Workplace disability 342Seth D. Harris and Michael Ashley Stein1 Introduction 3422 Economic theory 3433 Empirical work 3494 Areas for further empirical study 353

A Educational attainment 353B Health care 354C Discrimination 355

Bibliography v - - 357

13 Adjudication of workplace disputes 361Douglas M. Mahony and Hoyt N. Wheeler1 The nature of alternative dispute resolution procedures 3622 Employment arbitration and the law 3663S Employment arbitration and collective bargaining 3754 The evidence on employment arbitration 378

A Who prevails? 378B Amounts recovered 383C Why outcomes vary 385

5 Conclusions 390Bibliography 390

PART IV REGULATING EMPLOYMENT OF SPECIALPOPULATIONS

14 The economics of child labor 399Alessandro Cigno1 Introduction 3992 Theory 4003 Evidence 4064 Policy 410Bibliography 413

•?

15 The economics of slavery, forced labor and humantrafficking 418Patrick Belser1 Introduction 4182 Slavery 419

A The legislation 419B The magnitude of slavery 420C Demand and supply in the repugnant market 421

DE

F

Contents

Economic theoryEmpirical analysis(i) The profitability of slavery(ii) The 'Williams hypothesis'Slavery and its legacy today

Forced labor and human traffickingAB

CD

EFlioi

The legislationThe magnitude of contemporary forced labor andtrafficking jDemand for and supply of exploitable laborEconomic theory(i) Models of coercion(ii) Bonded labor(iii) Human trafficking(iv) Market failure and comparative advantageEmpirical analysisState-imposed forced labor

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PART V GOVERNING TERMINATION ANDPOST-EMPLOYMENT RELATIONSHIPS

16 DischargeJ.H. Verkerke1 Introduction2 The legal framework

A US employment and labor lawsB International comparisonsC Trends and legal change

3 Theoretical ambiguityA Predicted effectsB Market failures

4 Empirical investigationA International comparative perspective

(i) Early work(ii) More recent investigations

B Identifying the effects of US state lawsC Political economy of employment protection

5 ChallengesA Some inconvenient factsB Spillover effects

Bibliography

447

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xvi Labor and employmen t law and economics

17 Unemployment 480Stephen A. Woodbury1 Defining and measuring unemployment 480

A Types of unemployment 480B An illustration 482C Measuring unemployment 483D The unemployment rate and related labor force statistics 485

2 Modeling unemployment 487A Job-search and the reservation wage model 487B Job-matching and the trade-frictions approach 489

3 Unemployment insurance 490A Eligibility and benefit determination 491B UI benefit adequacy 493C Disincentive effects of UI and optimal UI benefits 496D Financing unemployment insurance 497E Policy issues in financing UI 499F Trust fund adequacy 499G Tradeoffs in the UI system 500

4 Training programs and re-employment policies 501A A brief history 501B Earnings losses of dislocated workers 504C How effective are training programs? 506D Intensive job search assistance 510

Bibliography 511

18 Intellectual property and restrictive covenants 517Orly Lobel1 Introduction 5172 Regulatory and contractual controls over employment-

based intellectual property 518A Non-competition agreements 519B Trade secrets 523C Invention assignment 526

3 f The information economy and the new world of work:industry-dependent policy? 528

4 Conclusion 531Bibliography 532

19 Pensions and retirement 539Jonathan Barry Forman1 Introduction 539

A Background: a brief history of retirement 539

Contents xvii

B Overview of the current US pension system 540C The international experience 542Types of pension plans 543A Defined benefit plans 543B Defined contribution plans 544C 'Hybrid' retirement plans 544D Individual retirement accounts and Keoghs 545E Nonqualified deferred compensation arrangements 545F Retiree health benefits j 546Regulation of pension plans v •-—- 546A Participation 548B Coverage 548C Vesting 548D Benefit accrual 549E Limits on contributions and benefits 549F Nondiscrimination 549G Other benefit rules 550

(i) Annuity payouts and lump-sum distributions 550(ii) Normal retirement age and age discrimination 550(iii) Premature distributions 551(iv) Minimum distribution age 551(v) Funding 551

The economics of pension plans 552A The life cycle model 552B Behavioral economics 552C The economics of tax deferral 554

(i) Qualified plans 554(ii) The saver's tax credit 556(iii) Roth arrangements 556(iv) Nonqualified deferred compensations

arrangements 556D The economics of pension funding 557E The economics of pension investing 558F The economics of Pension Benefit Guaranty

Corporation (PBGC) insurance 559The financial incentives created by pension plans 560A Tax preferences for pension savings reduce the work

disincentives inherent in the taxation of earned income 561B The accumulation of pension wealth encourages early

retirement 562C Benefit accrual patterns influence decisions about

work and retirement 563

xviii Labor and employment law and economics

(i) Traditional pensions penalize mobile workers 565(ii) Traditional pensions push workers into

retirement 566(iii) Defined contribution plans and cash balance

plans tend to be neutral about the age ofretirement . 568

D Retiree health benefits also influence the timing ofretirement 569

6 Other retirement policy issues 569A Only about half of Americansvhave-pensions 569B The current system may not provide adequate

retirement incomes 572C There are fewer traditional defined benefit plans 572D The trend toward phased retirement and bridge jobs 573E The decline of annuitization 573

Bibliography 574

PART VI GOVERNING GLOBAL LABOR MARKETS

20 Migration and labor markets: a brief survey 585Jagdeep S. Bhandari

21

1 Introduction2 Immigration and the labor market in the host country3 The neoclassical model4 Empirical results for the US

A Spatial studiesB Aggregate studiesC Effects on the high skills market in the US

5 Results from other countriesA GermanyB The United Kingdom

6 ConclusionBibliography

f

Employee collective action in a global economyJeffrey M. Hirsch1 Introduction2 Economic models of collective action

A Monopoly or cartel theory(i) Monopolistic strategies(ii) Means to achieve control over the supply of

labor

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Contents xix

B Other theories of unionism 611C Conclusion 613

3 Employee collective action in a global workplace 614A Traditional monopolistic pressure 614B Global coordination of employee groups 616C Codes of conduct 619D International treaties and standards 623

4 Conclusion 625Bibliography • 626

22 National regulation in a global economy: new governanceapproaches to 21st century work law 630Orly Lobel1 Introduction 6302 Globalization and its effects on national regulation 6313 Market and non-market ordering of the employment

relationship 6364 New governance approaches to national regulation 6405 Sequenced regulation 6436 Experiments in third-way regulatory approaches 6467 Conclusion 651Bibliography 651

23 International labor standards and international trade: aneconomic overview 666Richard N. Block and Jonas Zoninsein1 Introduction 6662 Definition of international labor standards 6673 The economics of international labor standards: a summary 668

A Economic arguments against the imposition ofinternational labor standards 668

B Economic arguments supporting the imposition ofinternational labor standards 669

C 'Comparing the arguments 6704 Selected models of international labor standards: the

International Labor Organization and the European Union 671A The International Labor Organization 671B The European Union • 673

(i) Working hours 674(ii) Collective bargaining 675(iii) Discrimination 675(iv) Occupational safety and health 675

xx Labor and employment law and economics

(v) Notice of large-scale layoffs 675(vi) Employee participation 675(vii) Maternity and parental leave 675(viii) Transfer of ownership 675

5 Trading blocs and labor standards 676A NAFTA 676B MERCOSUR 677C ASEAN 679

6 Summary and conclusions 680Bibliography ' — 681

PART VII THE FUTURE OF LABOR ANDEMPLOYMENT LAW

24 A labor law for the digital era: the future of labor and.employment law in the United States 689Katherine V. W. Stone1 Labor and employment law in the past 690

A The three new deal labor statutes 691B The operation of the collective bargaining laws 692

(i) The concept of the bargaining unit 692(ii) Secondary boycott prohibitions 693(iii) The definition of employee and employer 695(iv) The act's de facto exclusion of temporary

workers 696C Statutory protections for individual employees 697

2 The demise of the new deal system and the state of laborand employment law today 699

3 Labor law and employment protection in the future 702A Collapsing the distinction between labor and

employment law 703B Shifting from collective bargaining to legislation to set

employment conditions 707p C Expanding collective bargaining to new groups,

particularly geographically defined groups 709D Broadening the labor and employment law field 711E Creating a new type of safety net such as workplace

sabbatical/social drawing rights • 7124 Conclusion - 714Bibliography 715

Index 719