On the Economic Effects of Disobeyed Regulation in Employment Law

Alon Harel, Yuval Procaccia*, Ilana Ritov

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Mandatory 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.

Original languageAmerican English
Article number20160008
JournalReview of Law and Economics
Volume13
Issue number2
DOIs
StatePublished - 2017

Bibliographical note

Publisher Copyright:
© 2017 Walter de Gruyter GmbH, Berlin/Boston 2017.

Keywords

  • employment regulation
  • endowment effect
  • reservation wages
  • unenforced mandatory restrictions

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