Determining the Desirable Rules for the Labor Market: Labor Law

This chapter aims to introduce the views of law and economics on the rationale for the existence and function of rules governing the labor market and to understand the differences between the two views. In the labor market, labor services and the compensation for these services, known as wages, are determined through transactions between firms and workers. Some of these transactions occur on a daily basis within a firm’s organization, and others occur when a worker enters or exits the firm’s organization, as when starting to work or retiring from work. In both economics and law, measures to intervene in these markets and correct a distribution between the parties to a transaction are sometimes justified, but the two disciplines’ perspectives differ greatly. In law, the objective is to achieve justice between the parties, focusing on asymmetries in the bargaining power of the parties to each transaction. Conversely, economists argue that the market’s functioning should be corrected to realize desirable transactions from the perspective of overall labor market efficiency. In this chapter, we discuss the most important topics related to the labor market, namely, wages and job security, and we study the approaches taken by law and economics.