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Labor and Employment Law | Law and Economics


This article describes the distinctive approaches that law and economics takes to labour and employment law. The article distinguishes between ‘economic analysis of law’ and ‘law and economics’, with the former applying economic models to generally simple legal rules while the latter blends messier institutional detail with legal and economic thought. The article describes three eras of law-and-economics scholarship, recognizing that economics teaches that markets work and markets fail. Era One emphasizes that labour laws and mandatory employment rules might reduce overall social welfare by preventing a benefit or term from going to the party that values it most highly. Era Two emphasizes that labour and employment laws might enhance overall social welfare by correcting market failures arising from monopsony power, externalities, public goods, asymmetric information, information-processing heuristics, and internal labour markets. Era Three uses empirical methods to referee between markets-work and markets-fail approaches. The article argues that unequal bargaining power is not a standard market failure, because even powerful employers have a profit-maximizing motive to provide benefits, such as vacation or safety, that workers are willing to pay for.