On the Economic Effects of Disobeyed Regulation in Employment Law

Abstract

AbstractMandatory 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.