The political economy of labor market regulation by the European Union

Abstract

Since the introduction of qualified majority voting, at least 58 labor regulations have been imposed by the European Community/Union. Three types of explanations are considered: i) the asymmetry of the EC budgetary process, ii) regulatory collusion and iii) the strategy of raising rivals’ costs. Collusion and the strategy of raising rivals’ costs are compared in a two-country game-theoretic model with international capital mobility. The empirical analysis shows that the transition to qualified majority voting was not preceded by a striking tendency of competitive national deregulation. In all cases in which a directive was contested, the UK was among the contestants. Various indices show that the UK has the least regulated labor market. More generally, the anti-regulation coalition also includes Ireland, the Scandinavian countries and the Netherlands. There are examples showing that if the coalition is too small to block the regulation, its members prefer not to record their dissent officially. In most investigated cases, the European labor regulation is more restrictive than most but not all prior national regulations. The empirical analysis demonstrates that the strategy of raising rivals’ costs plays an important role in EU labor regulation.