Academic journal article Harvard Journal of Law & Public Policy

Employment Regulation and Youth Employment: A Critical Perspective

Academic journal article Harvard Journal of Law & Public Policy

Employment Regulation and Youth Employment: A Critical Perspective

Article excerpt

An important body of legal and economic scholarship considers whether, and to what extent, employment regulations increase firms' firing costs and reduce their demand for labor. (1) Researchers have debated this question for decades without reaching a definitive conclusion. In their contributions to this panel, Professor Heriot and Professor Epstein advance a decidedly anti-regulatory thesis. (2) They argue that U.S. employment laws harm American workers by significantly impairing the efficiency of U.S. labor markets. According to their account, firms would react to the repeal of existing labor regulations by hiring more workers, and, especially, by employing more young people.

In this brief essay, I offer a critical perspective on their hypothesis. First, the neoclassical economic theory on which they rely rests on several empirical assumptions that are at odds with the reality of contemporary labor markets. Indeed, no economic theory can provide a compelling a priori reason to repeal any of these regulatory measures. Second, concerns other than economic efficiency quite properly influence public policy. Plausible non-efficiency justifications support many current U.S. labor regulations and may trump the efficiency goals that Professors Heriot and Epstein wish to promote. Finally, the available empirical evidence casts considerable doubt on the argument that labor regulations in the United States dramatically reduce employment opportunities for young people, though most studies suggest that minimum wage laws modestly diminish youth employment.


Critics of employment protective legislation often rely on the neoclassical argument that these legal rules distort employers' decisions and interfere with labor market efficiency. (3) This line of argument, however, rests on several contestable assumptions. The theory requires a perfectly competitive market, in which no one exercises either monopoly or monopsony power. Workers also need reasonably full information about the characteristics of jobs and firms, and they must be able to move freely between jobs, in order to impose market discipline on those firms that treat workers poorly or fail to pay them well enough. Finally, there must be no externalities arising from employment and no subsidies that distort labor supply or demand.

These conditions are rarely, if ever, satisfied. Although traditional company towns are now, admittedly, quite unusual, scarce job opportunities undoubtedly give the dominant employer in certain local areas at least some market power. More broadly, features common to every labor market significantly impede job mobility. Location-specific investments--such as homeownership, family ties, and spousal employment--prevent many workers from relocating to take advantage of better opportunities elsewhere. Moreover, the lock-in effect of company-provided health insurance has long deterred workers with preexisting conditions from changing jobs, though provisions of the Affordable Care Act have now largely eliminated this problem. (4)

The other neoclassical assumptions fare no better. Information about firms can sometimes be adequate, but it is often incomplete and imperfect. And many subsidies and externalities influence both labor supply and demand. For example, the earned income tax credit, food stamps, and other income supports, as well as the charity care provided by most hospitals, distort workers' labor supply decisions. These cash and in-kind transfer payments allow firms to pay lower wages than the market would require in the absence of such social insurance measures. Similarly, companies of all kinds receive a vast array of subsidies--both direct payments and tax incentives--that dramatically alter their demand for labor. Political actors are extremely unlikely to eliminate most of these payments regardless of which party controls Congress, the presidency, or both.

That real world labor markets depart so dramatically from the assumptions of neoclassical economic theory undermines the claim that employment regulations distort a preexisting, efficient, competitive equilibrium. …

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