On the Economic Effects of Unenforced Regulation in Employment Law

Abstract

Mandatory restrictions in employment law, designed to promote the welfare of workers, are debated fiercely. Proponents argue that they protect workers. Opponents believe that they spawn inefficiency and harm workers. Yet all agree that their welfare implications depend on their degree of enforcement.This Article challenges the conviction that the welfare implications of such restrictions depend on enforcement. We show experimentally that unenforced restrictions cause workers' reservation wages to rise, i.e., workers charge higher wages when offered contracts that violate such restrictions. This observation is important to both proponents and opponents of such restrictions. We establish this claim experimentally by measuring the effects of unenforced restrictions on workers' reservation wages. Then we investigate several hypotheses as to why these effects are generated. Last, we point out that our findings have important implications in other contexts of contractual regulation, such as in the domain of consumer protection.