The Unjustified Absence of Federal Fraud Protection in the Labor Market
Posted: 12 Nov 1997
Federal law offers significant protection against fraud in the capital market, based on the compelling rationale that accurate information is important in allowing the securities markets to allocate financial capital to real capital. Notwithstanding some recent statutory adjustments, federal securities law remains committed to a central idea: it is wrong for a company or a corporate official knowingly to make a misrepresentation in order to take value from another in a securities transaction.
This article argues that rationales analogous to those justifying fraud protection in the capital market also hold true in the labor market. Fraud may in fact be more harmful in the labor market, because workers cannot easily minimize the risk of fraud through diversification. Yet even though fraud inhibits allocational efficiency in the labor market as in the capital market, there is no federal law making it unlawful for companies and corporate officials to lie to employees or prospective employees.
Because the common law and state regulation have not been, and will not likely be, adequate substitutes for national, statutory protection against fraud in the work place, the article explores the costs and benefits of federal statutory fraud protection for workers. The article concludes that the net benefits of a fraud regulation in the labor market is likely to be at least as high as in the capital market.
JEL Classification: K22, K31
Suggested Citation: Suggested Citation