Perhaps more than any other series of exchanges involving capital, the way the labour market operates has a direct impact on the welfare of workers and their families. For this reason, combined with the impact of the cultural, institutional, legal, and political aspects involved, this area of regulation represents an important, visible, and often controversial aspect of public policy.
Labour market regulation relates to several different aspects of employment conditions and pay, namely recruitment and dismissal; atypical work; working time; employee consultation; and bargaining arrangements.
There are various reasons why governments may choose to intervene in the
regulation of labour markets. These generally fall under two categories: market failures and injustice/exploitation.
Countries can choose to adopt several different approaches to regulating markets:
- Market-based regulation – This is often considered to be a form of non-regulation.
- Statutory – Regulation through labour laws, statutes and other decrees.
- Collective voice – Regulation through collective bargaining between businesses and unions.
Labour Market Regulation and Flexibility
Approaches to
labour market regulation are dominated by two opposing perspectives – what Freeman (1993) called the ‘institutionalist' and ‘distortionist' views.
- The ‘institutionalist' view sees job security arrangements, minimum wages, and collective bargaining as providing important social protection for workers, as instruments for encouraging productivity growth (through training and the accumulation of firm-specific skills), and as a means of moderating the effects of downturns in aggregate demand.
- The ‘distortionist' perspective emphasizes the advantage of market processes and is concerned that these institutional forms of regulation impede adjustments to economic shocks, discourage hiring, and favour ‘insiders' (i.e., regular workers).
(adapted from Betcherman, G., A., Luinstra, and M., Ogawa,
Labor Market Regulation: International Experience in Promoting Employment and Social Protection, visited 2009-08-04)
However, there is no basis for presuming that
labour-market regulations are invariably sources of rigidity and that deregulation is automatically the optimal solution. In many cases,
labour-market regulations have the positive benefit of promoting higher productivity and protecting vulnerable workers.
(adapted from International Labour Organization (ILO),
Global Unemployment Crisis Continues, Wage Inequalities Rising
, N. 18, 1996, visited 2009-08-03)