Employment regulation and youth employment: a critical perspective.

• Author: Verkerke, J.H.
• Position: The Federalist Society National Lawyer's Convention: 2014

An important body of legal and economic scholarship considers whether, and to what extent, employment regulations increase firms' firing costs and reduce their demand for labor. (1) Researchers have debated this question for decades without reaching a definitive conclusion. In their contributions to this panel, Professor Heriot and Professor Epstein advance a decidedly anti-regulatory thesis. (2) They argue that U.S. employment laws harm American workers by significantly impairing the efficiency of U.S. labor markets. According to their account, firms would react to the repeal of existing labor regulations by hiring more workers, and, especially, by employing more young people.

In this brief essay, I offer a critical perspective on their hypothesis. First, the neoclassical economic theory on which they rely rests on several empirical assumptions that are at odds with the reality of contemporary labor markets. Indeed, no economic theory can provide a compelling a priori reason to repeal any of these regulatory measures. Second, concerns other than economic efficiency quite properly influence public policy. Plausible non-efficiency justifications support many current U.S. labor regulations and may trump the efficiency goals that Professors Heriot and Epstein wish to promote. Finally, the available empirical evidence casts considerable doubt on the argument that labor regulations in the United States dramatically reduce employment opportunities for young people, though most studies suggest that minimum wage laws modestly diminish youth employment.

1. ECONOMIC THEORY IS INCONCLUSIVE

   Critics of employment protective legislation often rely on the neoclassical argument that these legal rules distort employers' decisions and interfere with labor market efficiency. (3) This line of argument, however, rests on several contestable assumptions. The theory requires a perfectly competitive market, in which no one exercises either monopoly or monopsony power. Workers also need reasonably full information about the characteristics of jobs and firms, and they must be able to move freely between jobs, in order to impose market discipline on those firms that treat workers poorly or fail to pay them well enough. Finally, there must be no externalities arising from employment and no subsidies that distort labor supply or demand.

   These conditions are rarely, if ever, satisfied. Although traditional company towns are now, admittedly, quite unusual, scarce job opportunities undoubtedly give the dominant employer in certain local areas at least some market power. More broadly, features common to every labor market significantly impede job mobility. Location-specific investments--such as homeownership, family ties, and spousal employment--prevent many workers from relocating to take advantage of better opportunities elsewhere. Moreover, the lock-in effect of company-provided health insurance has long deterred workers with preexisting conditions from changing jobs, though provisions of the Affordable Care Act have now largely eliminated this problem. (4)

   The other neoclassical assumptions fare no better. Information about firms can sometimes be adequate, but it is often incomplete and imperfect. And many subsidies and externalities influence both labor supply and demand. For example, the earned income tax credit, food stamps, and other income supports, as well as the charity care provided by most hospitals, distort workers' labor supply decisions. These cash and in-kind transfer payments allow firms to pay lower wages than the market would require in the absence of such social insurance measures. Similarly, companies of all kinds receive a vast array of subsidies--both direct payments and tax incentives--that dramatically alter their demand for labor. Political actors are extremely unlikely to eliminate most of these payments regardless of which party controls Congress, the presidency, or both.

   That real world labor markets depart so dramatically from the assumptions of neoclassical economic theory undermines the claim that employment regulations distort a preexisting, efficient, competitive equilibrium. Professor Epstein argues that repealing most employment regulations would move the market toward efficiency. According to the general theory of the second best, however, economic theory cannot tell us whether eliminating any specific policy measure will improve market efficiency. (5) Theoretical reasoning alone is insufficient to sustain Professor Epstein's claim about efficiency. It is instead an empirical question how regulation affects the labor market. Thus, a more defensible economic analysis would acknowledge significant real-world market imperfections and recognize that we need persuasive empirical evidence to evaluate the efficiency consequences of any specific regulatory measure.

2. NON-EFFICIENCY GOALS ARE IMPORTANT

   As we have seen, economic theory alone cannot guide us to an efficient legal regime. It is equally important to remember that public policy legitimately pursues goals other than economic efficiency. For example, an ongoing debate addresses the causes and consequences of income inequality in contemporary society. (6) Many people believe that principles of distributive justice require some form of social safety net. Others advocate far more aggressive redistributive measures.

   Wherever one stands on these issues, legislators often act to protect dignitary interests or to express approval or disapproval of conduct on grounds that are unrelated to efficiency. Thus, for example, a compelling defense of employment antidiscrimination laws rests on the expressive function of these statutes. (7) The goal of an employment discrimination statute may be, in part, to eliminate inefficient coworker discrimination--an efficiency motivation. But prohibiting employers from discriminating on the basis of race, sex, religion, age, disability, or sexual orientation also expresses social disapproval of those practices. Many advocates of these laws hope to shift social norms and transform our culture into one that rejects discriminatory attitudes and preferences. It follows that economic efficiency is neither a necessary nor a sufficient argument for any particular regulatory measure.

3. EMPIRICAL EVIDENCE

   If neoclassical theory rests on implausible assumptions about labor markets and if the single-minded pursuit of efficiency neglects important social values, then perhaps the available empirical evidence can at least tell us how employment protective legislation affects youth employment. Some critics--such as Professor Epstein--condemn all forms of labor regulation, including age discrimination statutes, wrongful discharge protections, minimum wage laws, and legal protection for collective bargaining. (8) Rigorous empirical work, however, tends to focus on one law at a time. For example, we might ask: What happens to youth employment when we adopt a statute outlawing both mandatory retirement and overt age discrimination? (9)

   Sadly, no study has attempted to answer that question. Instead, empirical economists have investigated whether the enactment of the federal Age Discrimination in Employment Act (10) helped older workers. Studies of age discrimination laws have found either no effect...