The (changing?

) idea of labour law

Guy Davidov
Faculty of Law
Hebrew University of Jerusalem, Israel
Email: guy.davidov@huji.ac.il

Forthcoming in International Labour Review, Vol. 146 (2007), No. 3-4

In recent years labour laws have been constantly under threat from governments favouring

“free markets” and from the pressures of global competition. This has prompted some labour

law scholars to rethink the traditional justifications for labour laws. Such rethinking is

certainly needed, whether to defend existing laws, or to suggest changes in order to respond to

new work arrangements and other management techniques that aim to evade the application

of labour laws. If we are to adapt the law in response to such changes, we must remember the

goals we are trying to achieve, and ask whether they are still relevant and worth achieving.

The aim of this short essay is to defend the enterprise known as labour law. The field

of labour law has long become used to attacks from neo-classical economists and their

political followers. Such attacks have intensified with the intensification of global

competition, which creates pressures towards deregulating labour markets in an effort to

attract investments and prevent the so-called “brain drain”. More recently, however, a new

line of “attack” on labour law has been posing a challenge from within the international

community of labour law scholars. Some scholars have tried to articulate a new justification

for labour law, ostensibly from a supportive position, in an attempt to make this body of

regulations more attractive to governments and employers. As I will argue below, however,

such efforts are likely to end up weakening this body of law and aiding the “race to the

bottom”, towards deregulation.

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 An inquiry into the values and purposes of labour laws can be conducted at a number

of different levels. One is descriptive: an attempt to reveal the hidden values and assumptions

behind judicial decisions or legislative measures in the field (e.g. Atleson, 1983). Another is

strategic: an attempt to “package” the goals in a way that will make them easier to “sell” to

both government and employers. This paper is concerned with neither of these approaches,

but rather focuses on the normative level. What should be the goals of labour law? What are

the reasons that might justify our existing body of labour laws and, perhaps, any specific

additions or changes to it? What is the idea behind labour laws that should inform our

interpretation of particular regulations? What is the purpose of labour laws that should be

invoked to defend them when such laws are challenged at the constitutional level? These are

the questions at the heart of this essay.

The “old” story (1): Unequal bargaining power

The traditional story is simple: employees suffer from inequality of bargaining power

vis-à-vis their employers. As a result they are in need of protection, and the law provides such

protection to employees (“the weaker party”) by ensuring minimal terms in legislation and by

opening the possibility of collective bargaining. The need for labour law is thus explained by

reference to the inadequacy of contract law (or the market) in the context of employment

relations. The law of contract presupposes the ability of both parties to the contract to agree

freely on terms that are mutually beneficial. When one party (the employer) is systematically

stronger, the law can no longer assume that the terms of the contract reflect the free will of

both parties. The law thus intervenes to ensure a degree of fairness in the relationship.

The idea of unequal bargaining power in employment relations was famously put by

Adam Smith, as follows: “it is not … difficult to foresee which of the two parties must, upon

all ordinary occasions, have the advantage in the dispute, and force the other into a

compliance with their terms… The masters can hold out much longer… Many workmen

could not subsist a week, few could subsist a month, and scarce any a year without
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employment” (Smith, 1776, p. 169). Although unemployment insurance in the modern

welfare state significantly improves the situation of the employee, the basic inequality of

power described by Smith is still apparent today.

While Smith focused on the inequality of resources that influences the terms of the

contract, later on labour lawyers pointed to the additional inequality inherent in the

relationship itself – the subordination that characterizes employment relations (Davies and

Freedland, 1983, Chapter 1; Collins, 1986). Indeed, even employees with special skills or

expertise that hold significant bargaining power vis-à-vis the employer when negotiating the

terms of their contract end up agreeing to the same basic structure that requires obedience to

the employer. The right of the employer to issue commands and make unilateral decisions

with regard to the workplace confers significant powers, which can sometimes be abused.

This is yet another reason for the inequality of power that has traditionally explained the need

for labour laws.

Both aspects of this inequality have been contested by economists, who have argued

that the employment relationship is not different from any other contractual relationship.

While this is hardly convincing (see Davidov, 2006), it is true that the concept of unequal

bargaining power is problematic for explaining labour laws, because in fact there never is

equal power in contractual relations. It is probably better, therefore, to refer to the systematic

vulnerability of employees vis-à-vis their employers. This vulnerability is manifested by

democratic deficits (subordination) – being subject to the employer's command – and by

dependency (economic and otherwise) on the particular relationship, i.e. the relative inability

to spread risks (Davidov, 2002).

The “old” story (2): Equity vs. efficiency

Whether we use the traditional concept of “unequal bargaining power” or refer to the

vulnerability of employees in the employment relationship, it is clear that the “old” story is

not concerned with efficiency. The economists’ view of labour law as a cost, impinging on
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the efficient management of business, is implicitly accepted by this story. Neo-classical

economists insist that efficiency is achieved by letting the markets work freely, and they

consider any “intervention” – such as labour laws – to be harmful in this respect.

Traditionally, labour lawyers have not been concerned with such arguments; and in effect

they have (implicitly) accepted them. They simply considered this “intervention” to be

necessary on other grounds – achieving fairness or distributive justice, defending human

dignity, promoting equality and workplace democracy, and so on.

The “old” story, therefore, has not challenged the basic confrontation of equity versus

efficiency put forward by economists, which automatically identified labour laws as trying to

achieve “equity” at the expense of “efficiency”. The issue thus became very simplified and

ideological – one supported either efficiency (equated with the free working of markets) or

equity (seen as intervention in the market in favour of other goals). With this view of labour

law prominent, it is hardly surprising that conservative governments have put much effort in

recent decades into dismantling or at least vilifying the body of labour law.

The idea that there must be a trade-off between equity and efficiency conforms well

with the portrayal of employment relations as confrontational. Karl Marx famously described

the inherent conflict of interests between employers and employees, on three different levels

(Marx, 1891). First, the higher the wages (and benefits) the lower the profit left to the

employer. Second, there is a conflict regarding decisions concerning the work itself (what is

to be manufactured, how, etc.) – given the worker’s interest in his/her work. Finally, there is a

conflict regarding the division of labour – the employer sometimes wants to divide the work

into repetitive, uninteresting and unchallenging tasks, while the worker usually prefers a more

varied and fulfilling job. All of this suggests an inherent conflict, which is usually settled in

favour of the employer because of the latter’s superior bargaining position. It thus becomes

clear why we need labour law: to avoid the one-sided, unfair settlement of the conflict. The

role of labour law is therefore, to a large extent, redistributive. At the stage of negotiating the

contract, labour laws either dictate minimum terms (i.e. the end result) or strengthen the
4
power of the employee by allowing and encouraging collective bargaining. During the course

of the employment relationship itself, labour laws again either set limits on the decisions that

the employer can take, or ensure some participation of employees in the decision-making

process, for example through works councils. Either way, it can be seen as redistribution of

power and resources from employers to employees.

To be sure, the inherent conflict of interests is not as severe as it was in Marx’s day.

Some employers now realize that higher wages and benefits may lead to higher productivity

(see, for example, Akerlof and Yellen, 1986). And with the advancement of technology, the

knowledge and creativity of employees are often keys to the success of businesses, making

the Fordist-style division of labour much less common. But it is difficult to deny that today as

well, there is still some inherent conflict of interest between the parties which can explain the

need for labour law. The market may bring about efficient results, but at least in the context of

employment, these are often unjust results. The task of labour law is to prevent, or remedy,

this failure, by giving preference to equity considerations (whether redistributive or

otherwise) over efficiency ones.

It should be stressed out that there is nothing “natural” or unavoidable about the way

power and resources are allocated pre labour law. To a large extent it is dictated by the law

itself: by the laws of contract, property, corporations and so on, that give significant powers to

those already holding resources. Indeed, the law plays an important role in helping those with

resources (not always acquired fairly and democratically) to perpetuate and strengthen their

superior position. In other words, labour law is not an intervention in a truly “free” market.

The pre-labour-law market is not free from regulations, it is simply regulated in favour of

those with more resources (who get protection for their property, validation for the contracts

which they enter into from a superior position, and the ability to escape liability by using a

corporate shield). Labour law can be seen as a necessary part of this “package” of regulations

which determines how markets should work. Nonetheless, this understanding is not

contradictory to the view of labour law as redistributive. It is merely a reminder that there is
5
nothing “natural” or “sacred” about pre-labour-law distribution. When labour law is

introduced, the allocation of power and resources is changed. Whatever the reasons for the

previous allocation, it is useful to see this as redistribution.

The “updated” story: Correcting market failures and market outcomes

While the “old” story, based on the concept of “unequal bargaining power” and the

need for redistribution, is still prevalent today, over the past couple of decades a number of

scholars have introduced a significant addition to it. Challenging the apparent consensus that

labour laws are a cost (or a “tax”) and reduce efficiency, they have shown that labour laws

can actually improve efficiency. It has not been suggested that the entire body of existing

labour laws necessarily improves efficiency. Obviously the implications of each regulation

should be examined separately, and scholars arguing that labour laws could be efficient have

usually made an effort to emphasize that this is not always the case. But to the extent that

labour laws are indeed efficient, the justification for their existence is much stronger. In such

cases there no longer is a trade-off between equity and efficiency, between justice and the

market; it is a win-win situation, where a regulation supports both equity concerns and

efficiency at the same time.

Theoretically, the idea that labour laws could be efficient relies on the existence of

market failures. The neo-classical economic theory of the market is based on a number of

assumptions that are often unrealistic. Thus, for example, all players in the market are

assumed to be rational, possess full information and have the ability to move from one job to

another (even in a different geographical area) without costs. In practice, this is obviously not

a realistic characterization of labour markets. To be sure, neo-classical economists know very

well that markets do not always work perfectly. But they like to assume that such failures are

trivial in magnitude and that they therefore could be ignored. This view is untenable for any

observer of real-life labour markets. And indeed, as will be shown shortly, empirical studies

of specific labour markets have demonstrated how imperfect these markets are. If market
6
failures are prevalent, then regulations can be useful in correcting those failures and, as a

result, in improving the efficient working of the market.

For example, labour laws can sometimes minimize information asymmetries,

transaction costs or monopoly power (Collins, 2000, pp. 7–11). Similarly, labour laws can

sometimes overcome collective action problems, which lead to inefficient results. Moreover,

they can confront difficulties resulting from the incomplete nature of the employment

contract, by promoting trust in the relationship (Deakin and Wilkinson, 2000), or prevent the

externalities resulting from the fact that firms' actions to maximize profit often ignore their

impact on society at large (Sengenberger, 1994, p. 5).

Empirical research has corroborated the “updated” story. It has been shown, for

example, that labour unions can enhance efficiency because the job security that comes with

collective agreements can boost productivity (e.g. Freeman and Medoff, 1984, Chapter 11;

Kuhn, 1998; for a fuller discussion and additional references, see Davidov, 2004). It has

similarly been shown that a legislated minimum wage can sometimes prevent payments below

the market rate, thus similarly enhancing efficiency (e.g. Card and Krueger, 1995). In other

contexts as well, researchers have shown that labour regulations do not have the negative

impact expected by neo-classical economic theory (e.g. Manning, 2003). This is not to say

that labour laws never cause inefficiencies; it does, however, show that the equity-efficiency

trade-off is much less dramatic than traditionally described. Inefficiencies are not an

automatic and necessary result of labour regulations. Sometimes such regulations even have a

positive impact, i.e. equity and efficiency can co-exist. At other times, the inefficiencies are

small, or at least could be made small with some amendments, and are thus insignificant

compared with the goals of the regulations and the underlying equity concerns (see, for

example, Davidov, 2007). Significant head-on clashes between efficiency and equity

considerations may still occur in the field of labour law, but they are probably the exception

rather than the rule, as previously assumed.

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New (internal) challenges: Renouncing redistribution

The “old-but-updated” story does not renounce the basic understanding that

employees suffer from inequality of bargaining power, or vulnerability, vis-à-vis their

employers, and that, accordingly, an important aspect of the labour law enterprise is

redistributive. Either by intervening in the result of the negotiations between the parties (the

terms of the contract of employment), or by intervening in the process (for instance, by

facilitating collective bargaining), the law transfers power and resources from the employer to

the employee. The idea of redistribution through labour law has always been repugnant to

conservative economists (e.g. Friedman, 1962), but for labour lawyers the justification for

such redistribution has usually been considered self-evident. Recently, however, some

internal challenges have begun to appear. In recent articles published concurrently, two

prominent North-American labour law scholars, Brian Langille and Alan Hyde, have both

argued against the idea of redistribution by labour law.

Langille has argued strongly against any view of labour law as a “tax”. He articulates

the idea of labour law in very general terms, as a body of regulations designed to enhance

human freedom and maximize the productive use of human capital. Labour standards and

employment benefits are needed, according to Langille, to remove “obstacles to the

realization of … human capital” (2006, p. 34). Apparently he wants employers and

governments to understand better the importance of these broad goals for everyone:

employees, employers and society at large. He also believes that labour laws can advance

these general goals. The basic idea is useful and important; it can be seen as suggesting a new

articulation and emphasis with regard to labour law’s “equity” concerns. However, Langille

also makes an effort to denounce any purported justification of labour law that does not

advance the interests of all parties involved. He seems to be annoyed by the description of

employees as “the weaker party” or as being “in need of protection” (see also Langille, 2002,

p. 142). This suggests a power struggle within the employment relationship, rather than the

merger of interests that he sees. In short, Langille appears to object to the traditional idea that
8
labour law also has a redistributive aspect. He wants to downplay the clash between the

interests of employers and employees that labour law has to regulate.

In a somewhat similar vein, Hyde also wants to do away with the redistributive

function of labour law. He argues that labour laws should be seen as means for addressing a

series of market failures. And while he adopts a rather broad definition of such failures

(including inelasticity of supply, collective action problems, low trust, opportunism, sub-

optimum investment in human capital and information asymmetries), goals external to the

market are explicitly absent. To be sure, Hyde does not deny that such goals could be

desirable as well. He admits that “there is no theoretical reason for labour law to restrict itself

to facilitating efficiency” (2006, p. 58). He goes on to argue, however, that there are “practical

reasons for focusing on efficient solutions to market failure. For labour law to achieve other

values, it must have sanctions”, and since legislatures “have limited scope for imposing on

private actors results that are inefficient from the private actors’ point of view… persistent

attempts to impose inefficient solutions engender non-compliance, off-the-books

employment, informalization, and similar responses that put all of labour law into poor

repute” (pp. 58-59).

Hyde’s views seem to be in line with the traditional economic view that redistribution

should be left to the tax and welfare systems (see, for example, Kaplow and Shavell, 1994). In

recent years, however, there has been a heated debate about the wisdom of this view, with

growing numbers of scholars justifying the infusion of distributive justice considerations into

private law doctrines (e.g. Kronman, 1980; Sanchirico, 2000). These scholars argue against

the assignment of efficiency and equity concerns to two different spheres, showing that a

strategy insulating private law from distributive values would lead to less equity and possibly

also less efficiency. If this is the case with regard to property, tort or contract doctrines, it is

certainly all the more so when dealing with labour law – where distributive considerations are

so central, and most of the regulations intervene ex-ante rather than ex-post (thus avoiding the

difficulties of case-by-case, non-general redistribution). More generally, by turning labour

9
law into just another subset of market regulation, Hyde in effect breaks the connection

between labour law and its traditional justifications. This, in turn, is likely to lead to a dilution

of regulations in this field (for similar critiques see Collins, 1989; McCallum, 2007).

It should be stressed that neither Langille nor Hyde explicitly suggests annulling those

parts of labour law that do not conform with their new story. Indeed, they can even be read as

attempting to expand, rather than narrow, the scope of labour law (Countouris, 2007, p. 251).

But such narrowing appears to be the obvious outcome of their approach. If we are to focus

solely on non-redistributive justifications, then how can we explain and defend those parts of

labour law that currently redistribute power and resources from employers to employees? This

is why I consider these two articles to be a new – internal – challenge to labour law.

Conclusion: The (unchanging) idea of labour law

The “old” story of labour law was incomplete and one-dimensional. It ignored the

importance of efficiency considerations and accepted the basic economic view that labour

laws are always (almost by definition) inefficient. The debate about the desirability of labour

laws thus focused entirely on one’s ideological bent – one was either in favour of letting the

market work and maximizing efficiency, or in favour of other (“equity”) considerations. The

new internal challenge suffers from the same weakness. Just as the “old” story-tellers believe

that there is always a clash between labour law and market values, the new challengers ignore

the clash between labour law and the market values, or more generally (in Langille’s case),

between employers’ and employees’ interests. The new challenge to the labour law enterprise

is therefore similarly one-dimensional.

In reality, life is more complicated. Labour relations have many different dimensions,

and so do labour laws. In labour relations, there is trust alongside mistrust; merger of interests

alongside conflict of interests; rational behaviour alongside irrational behaviour;

inefficiencies alongside efficiencies. Labour law should be sensitive to all of these dimensions

and, to a large extent, it is. The extensive body of labour law includes regulations that can be
10
seen as correcting market failures, alongside regulations that accept a clash of interests and

redistribute power and resources from one side to the other.

The “old-but-updated” story takes this complexity into account. Difficulties of

compliance in some cases should not deter us from pursuing a justified agenda. The relations

of employers and employees are characterized by the vulnerability of the latter. Employees

have to submit themselves to a relationship with democratic deficits. They also develop

dependency on their relationship with a specific employer, both economically and for the

fulfilment of social-psychological needs. Labour laws are thus needed in order to minimize

democratic deficits and dependency, and to correct unacceptable outcomes of this

vulnerability (Davidov, 2002). Sometimes they may also produce better outcomes for the

employer. Sometimes labour laws have a positive impact on efficiency. But the asymmetry in

the relationship is still a prominent characteristic, which labour laws are designed to

counteract.

In recent years the (external) pressures on labour law have intensified. Employers,

who have always wanted to free themselves from the constraints of labour laws, are facing

ever-growing competition in a global market and are looking for new ways to cut the costs

associated with labour laws. Governments dealing with ever-growing welfare-state

expenditures are leaning towards “free market” solutions and have grown suspicious of the

effects of labour regulations. Governments trying to attract global investments have also been

lured into cutting taxes and other constraints on businesses, including labour laws. Trade

unions, which used to play a crucial role in defending and ensuring compliance with labour

laws, have seen significant erosion of their power and influence. These developments have

not weakened the need for labour law. On the contrary, workers need the protection of the law

more than before. It is important to restate, and perhaps re-articulate, the case for labour law.

But the basic idea of labour law – including its all-important redistributive function – has not

changed. We should be wary of any attempt to undermine it, including (and perhaps

especially) attempts from within.

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 This line of reasoning may be considered anachronistic. An attempt to defend the

“old” (even if updated) rationale of labour law may seem unfashionable (see McCallum,

2007, p. 2) and oblivious to the harsh criticism levelled at European labour market

“rigidities”. It should be made clear, then, that I have not argued that no changes are needed.

My aim was not to defend any specific set of regulations. It is possible that some specific

labour laws need to be updated, whether by relaxing obligations on employers or by

strengthening them – and this question must obviously be examined at the level of specific

regulations. However, the purpose of this short essay was different: to consider, at a very

general level, developments with regard to the idea of labour law as a whole. I hope I was

able to put forward a convincing case in defence of this battered enterprise.

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