Legal Origin and the Evolution of Labour Market Regulation in Seven Six Countries, Sean Cooney, The University of Melbourne Peter Gahan, Monash University Richard Mitchell, Monash University Ian Ramsay, The University of Melbourne

Legal Origin Effects “So, what do we learn from these [results]? The economic consequences of legal origins are pervasive. Compared to the French civil law, common law is associated with: a)better investor protection, which in turn is associated with improved financial development, better access to finance, and higher ownership dispersion, b)lighter government ownership and regulation, which are in turn associated with less corruption, better functioning labor markets, and smaller unofficial economies, and c)less formalized and more independent judicial systems, which are in turn associated with more secure property rights and better contract enforcement.” La Porta deSilanes and Schleifer (2008) “The Economic Consequences of Legal Origin.” JEL

Why is this debate significant? LO has been highly influential as a policy rationale, particularly for international agencies such as the World Bank, OECD, ADB... Has been highly influential and controversial in a wide range of academic debates. – Andrei Schliefer, Rafael LaPorta and Lopez DeSilanes are ranked 1, 3 and 4, respectively, on the Thomson ISI, Scientists Rankings in Business and Economics (last accessed 26 Oct 2010). They are now the most cited researchers in all disciplines in the area of business and economics over the last 10 years. (Djankov is ranked number 9; Glaeser at 21) – Subject to considerable criticism and as well as research to extend the core findings from the original studies. – Now a growing debate within comparative employment relations, international business, and other areas in organisational studies.

Legal Families Legal Family Common Law (Socialist) Civil Law French German Scandinavian

Characteristics of common & civil law systems Common law systems Appellate judges establish precedents by solving specific legal disputes to order legal rights. Uses an adversarial approach to fact-finding and decision making. Judges independent of executive and legislature. Civil law systems Uses detailed statutes and comprehensive legal codes to order legal rights. Uses an inquisitorial approach to fact-finding and dispute resolution. Limited judicial discretion in decision making; subordinate to the legislature.

Where do legal systems come from? Legal traditions are typically transplanted from “origin” countries, usually through conquest or colonisation. These transplants may include: – specific legal texts, legal infrastructure, – individuals with “origin country” training and human capital, and/or – Religious, cultural or ideological conditioning of the legal system.

Explaining LO effects LO represents an involuntary transmission of bundles (“complements”) of information technology from origin to colonised population, which subsequently become “locked-in” as the legal approach to ordering of economic life. French legal origin embraced “socially-conditioned private contracting”, while common law supported “unconditioned private contracting.” Civil law →Detailed legal codes →“policy-implementing” → inflexible, rigid Common law → Setting general legal framework →“dispute resolving.” → adaptable to changing circumstances

Source: La Porta, deSilanes and Schleifer, 2008

LO and the Regulation of Business This study is part of a larger project investigating the impact of Legal Origin on the form, evolution and impact of business regulation in the Asia-Pacific: Business regulation (creditor protection, shareholder protection); and Labour market regulation (worker protection) Today, I will focus on labour law (labour market regulation).

Legal Origin & Labour Market Regulation Legal Origin researchers have proposed that legal origin has a pervasive effect on the functioning of labour markets. – Principally through the extent of government regulation. – But also through a judicial quality effect on contract enforceemnt. Predicts that Civil Law countries will: – Have more extensive labour market regulation; – Higher unemployment & lower participation; This work has also be subject to considerable review, criticism and debate. – Conceptual, historical, measurement, methodological, inferential Limited attention paid to Australia or the Asia – Pacific region.

Our key questions today Is a “legal origin effect” evident in the level of protection (“protective strength”) provided to workers? Has the strength of any legal origin effect changed over time? To what extent have legal origin effects been ameliorated by convergence in labour market regulation.

Measuring labour market regulation Botero et al (2004) concerned to assess the marginal cost effects of regulation on the business enterprise. A measure encompassing 3 dimensions of labour market regulation: – Employment law The regulation of alternative employment contracts, The cost of increasing working hours The cost of firing workers The strictness and complexity of dismissal procedures, – Collective relations law Statutory protection and power of unions Protection of workers in collective disputes – Social security law Various welfare benefits (old age, disability, death, unemployment)

Measuring labour market regulation #2 Botero et al measure labour market regulation for one period, for 85 countries; they measure “law on the books” only. Alternative measure provided by Deakin et al (2007, 2009a and b): – Develop index of the “protective strength” of labour law. – Measure “law in practice,” not just law on the books. – Estimate indices for multiple periods, for 5 countries. – Use multiple items to develop 5 sub-indices covering regulation of Alternative employment contracts, Working time, Dismissal, Employee representation, and Industrial action

Alternative employment contracts

The Regulation of Working Time

The Regulation of Dismissal

Employee Representation

Aggregate Index - Australia

Aggregate Index – 6 countries

Theories of convergence - variations Convergence could involve: – Convergence on a reduced level of protection (race to the bottom). – Convergence on a single hybrid model (harmonisation). – Convergence on a particular country model (Americanisation). – Bipolar convergence (strategic choice, legal origins). – Open convergence (converge on an unspecified model).

Convergence among countries, and within legal origin Coefficient of variance = std deviation/mean

Mean differences in labour market regulation from other countries’ laws A value of 0 means no difference between a country’s labour law and the average strength of labour laws for all countries.

What can we say so far? A ‘strong’ version of the legal origins hypothesis would predict a clustering of countries with common law countries having a low value on our measures, while civil law countries would have a high value. – Differences based on LO evident, but: A lot of change in the protective strength of labour law in individual country. Some countries appear to be intermediate cases (India and, possibly, Australia). A ‘weak’ version would predict a tendency towards persistent differences between common and civil law countries. – Australia appears to be ‘reverting to type’ Periods of convergence and divergence are evident over time.

Where to from here? Data collection – Coding creditor protection and shareholder protection indices for the same period. – Coding a larger sample of countries (existing countries + China, India; Hong Kong,, Malaysia, the Philippines and Taiwan). – Reworking the Deakin et al coding framework. – Thinking about differential weighting for individual items or sub-indices. Thinking about antecedents – If legal origins gives us a weak story to explain patterns of divergence and convergence, what else provides an explanatory story? – Researching qualitative histories of legal evolution to make sense of the quantitative data.

Where to from here? Methodological approach – Standard approach (e.g., Traxler 2003, Storm & Naastepad 2009) Output (Q c )= a + βCapital c + βLabour c + βΦ c ) + e Productivity Growth (ΔQ/L) c = a + β(GDP) + β (real wage) + β'Φ + e – Institutions ( Φ) become a black box; the mechanism through which they might have an effect is not clear. – There are now a plethora of models which specify different pathways through which labour market regulation can have an effect on output, productivity, exports/imports, as well as other outcomes.

Where to from here? Alternative approach (Rajan and Zingales, 1998) – Institutions will have a differential effect at the industry (and firm) level, depending on the extent to which an industry (firm) is dependent on that institution, or uses it intensively. For example, we would expect employment security to have a disproportionate impact on a sector which experiences greater volatility in sales/output. Q c, i = a + β(Capital c * k_int c, i ) + β(Labour c * l_int c, i )+ β' (Φ c * int c, i ) + e where k_int and l_int are measures of capital and labour intensity for industry i and country c; and Φ c and int c, i are vectors of variables measuring national institutions (regulation) and the intensities with which industry relies on that institution, respectively.

Where to from here? Thinking about consequences – Industrial relations outcomes Unionisation and collective bargaining coverage. Strikes and lockouts. – Economic consequences Productivity growth Patterns of production and trade Employment, unemployment and participation rates. Diffusion of innovation – Social consequences Inequality Subjective wellbeing