Labor Flexibility, Legal Reform and Economic Development

Abstract:     
The current global financial crisis has provoked intense criticism of the regulatory framework for financial markets. Financial market flexibility, once considered the key to successful financial institutions and economic growth, has now come under intense scrutiny. In contrast, labor market flexibility is still promoted by scholars and international policymakers as an essential part of the recipe for economic development. This Article argues that the predominant understanding of labor flexibility is misguided and needs to be revised. To illustrate why, the Article undertakes a critical examination of labor flexibility as developed by a leading World Bank project, called “Doing Business.” It argues that the project mischaracterizes countries’ labor regulations by failing to consider the full range of legal sources, surveying only the law in the books, and remaining blind to the realities of lack of enforcement and rampant economic informality. More importantly, the project promotes a binary understanding of flexibility that fails to capture the relational character of legal entitlements. Proposed legal reforms in the direction of “flexibilization” can therefore be both costly and ineffective. As an alternative, this Article develops a framework which, incorporating insights from comparative law and legal theory, proceeds in two steps. First, it undertakes a doctrinal assessment of the respective rights, duties, and privileges of employers and employees in the labor market, and asks whose flexibility is enhanced. Second, it pays attention to the link between the formal and informal economic sectors. Using the examples of the United States and Mexico, the Article illustrates how this new framework can lead to a better sense of the relationship between labor law and a country’s economy, and can be used as a better map for regulatory reforms.

Number of Pages in PDF File: 65

Keywords: labor flexibility, Doing Business reports, legal origins

JEL Classification: F33, K31, K33, N20, N30

Accepted Paper Series