Neoclassical Labor Economics: Its Implications for Labor and Employment Law

Research Handbook on the Economics of Labor and Employment Law 20 (Cynthia L. Estlund & Michael L. Wachter, eds., 2012)

U of Penn, Inst for Law & Econ Research Paper No. 13-34

36 Pages Posted: 15 Dec 2013

See all articles by Michael L. Wachter

Michael L. Wachter

University of Pennsylvania Law School - Institute for Law and Economics

Date Written: 2012

Abstract

Whereas law and economics appears throughout business law, it never caught on in legal commentary about labor and employment law. A major reason is that the goals of the National Labor Relations Act (NLRA), the country’s foundational labor law, are at war with basic principles of economics. The lack of integration is unfortunate if understandable. Notwithstanding the NLRA’s normative goal to keep wages out of competition, economic analysis applies as centrally to labor markets as to any other market. One of the NLRA’s primary goals is to equalize bargaining power. Its drafters envisioned achieving this goal through procedural and substantive means: increasing the number of people covered by collective bargaining contracts and raising union wages above competitive levels. These goals, however, are in conflict. For the NLRA to succeed, the relationship between demand (employment) and prices (wages) would have to be upward sloping. Unfortunately, the reverse is true. While the adverse tradeoff between above-market union wages and union employment was not as marked in the Wagner Act, the NLRA’s vision became unattainable once the Taft-Hartley amendments sanctioned competition between union and nonunion models of the employment relationship. This Chapter uses neoclassical economics to analyze several theoretical and policy issues. For example, it considers the efficiency wage theory that unions can raise productivity to offset above-market pay. Efficiency wages work when employees respond to a reward, as in above market pay, with greater loyalty. Yet union workers are more likely to be loyal to their labor unions than the firm that the union claims resisted the higher pay. The efficiency wage model works better in the nonunion model, the context in which it was first developed. While unions may be preferred on normative grounds, the highly competitive political economy of the United States makes it difficult for unions to succeed.

Keywords: Law & economics, union wage premium, union density, allocative efficiency, labor and employment policy, general equilibrium theory, cartels, welfare, internal and external labor markets, employment contracts, market failures, training, risk aversion, information asymmetries, transaction costs

JEL Classification: D61, J24, J31, J40, J50, J51, J58, K31, L51

Suggested Citation

Wachter, Michael L., Neoclassical Labor Economics: Its Implications for Labor and Employment Law (2012). Research Handbook on the Economics of Labor and Employment Law 20 (Cynthia L. Estlund & Michael L. Wachter, eds., 2012); U of Penn, Inst for Law & Econ Research Paper No. 13-34. Available at SSRN: https://ssrn.com/abstract=2367520

Michael L. Wachter (Contact Author)

University of Pennsylvania Law School - Institute for Law and Economics ( email )

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Philadelphia, PA 19104
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