Private Sector Labor Regulation

Most labor regulations tend to assume an adversarial relationship between workers and management, rather than jobs being mutually beneficial agreements reflecting the negotiated preferences of workers and firms in meeting a business’s collaborative goals. As regulation has proliferated, it has often sought to impose one-size-fits-all constraints on workers and firms. The practical effect is not merely needless tension between workers and their employers but also a watering down of both workers’ freedom to contract their labor and employers’ flexibility to run their enterprises. This constrains jobs from reflecting the particular wants, needs, and circumstances of employees and employers.

The ways in which governments restrict the freedom of businesses to contract or adjust their workforces are legion. For example, anti-discrimination laws protect certain demographic classes from being fired or treated differently by employers based on their sex, gender, race, age, religion, or national origin.¹ Freedom to contract has been limited by federal and state minimum wage laws, overtime pay regulation, scheduling laws, restrictions on independent contracting, and states refusing to enforce noncompete clauses. Congress and other levels of government also mandate a range of employer-provided benefits that were previously voluntary, including family leave, medical coverage, and pregnancy benefits through the Family and Medical Leave Act.

Most such laws and regulations are simply assumed to benefit American workers, but economics tells us that they can reduce the availability of jobs and change the composition of workers’ remuneration in ways that many workers might dislike. At best, these laws help some workers enjoy more security or higher pay or benefits—but they do so at the expense of others, who often suffer heavily. For example, the bulk of research on increasing minimum wage rates finds that they raise hourly pay for most affected workers but that they lower overall employment levels or hours worked. This can reduce job prospects for young and unskilled workers.²

There are two broad reasons to be worried about existing and possible new government policy barriers to hiring, firing, or freely negotiated contractual arrangements in the jobs market.

First, cross-country evidence suggests that restrictive labor market regulations raise the structural level of unemployment, particularly for demographic groups with the weakest attachment to the labor market, such as young and low-skilled workers. That is, there is a long-term shift in employment that places these workers at a serious, even permanent, disadvantage. Countries in the European Union have even more labor regulation than the United States, and the EU tends to have both lower employment rates and higher unemployment rates (see Table 1). These differences are particularly hard on young workers. Prior to the pandemic, for men and women, the EU saw youth unemployment rates (15–24-year-olds) of 15.3 percent and 14.8 percent. This compares to just 9.4 percent and 7.3 percent in the United States.³

Second, the United States has already experienced a decline in the mobility of its labor market in recent decades, with a reduction in the movement of both jobs and workers across states, demographic groups, and industries prior to the pandemic. This lack of job fluidity has had worrisome effects for productivity and wages and, again, was especially acute for younger and less-educated workers.⁴ While some of this trend is driven by the effects of an aging population, it is worsened by policies that make it more difficult to hire workers. Indeed, Engbom (2022) found that lower job-to-job mobility (fewer transitions between jobs) across Organisation of Economic Co-operation and Development (OECD) countries resulted in 20 percent lower wage growth across a worker’s lifecycle, alongside a 9 percent fall in aggregate productivity, when compared with the United States (see Figure 1).⁵ This is consistent with prior research that found a strong link between job transitions and higher wages.⁶

Importantly, Engbom found that as policies and regulations raise the cost of doing business or hiring workers, job-to-job fluidity declines (see Figure 2). This linkage and its effects have continued since the pandemic began. In Europe, labor laws and pandemic policies have discouraged separations and restricted competition, and according to the OECD, job-to-job transitions are less frequent as a result. Workers across Europe, in turn, have experienced fewer working hours, weaker wage growth, much higher involuntary part-time work, and higher overall unemployment than their American counterparts.⁷

Although burdensome laws that have existed for decades cannot logically explain recent labor fluidity declines, undoing them could permanently raise the level of U.S. dynamism and improve productivity levels, much to American workers’ long-term benefits.

These findings are especially pertinent today because there is political momentum—mainly from the left but also from certain parts of the right—for expanding U.S. labor regulation in a more static, “European” direction. For example, recent proposed legislation has sought to do the following: introduce a $15 federal minimum wage; expand government interventions into collective bargaining agreements; prohibit noncompete contract provisions; shoehorn gig economy and other independent workers into traditional employee-employer regulatory frameworks; and mandate benefits such as paid leave. These policies not only risk eliminating jobs, schedules, and compensation packages that many American workers desire but could also reduce the nation’s job mobility, making it less productive and poorer. The prospect of legislated stasis is of particular concern today, as the pandemic induced significant structural shifts in both the types and locations of American firms, workers, and jobs based on changing tastes and ambitions.⁸

Indeed, there is substantial evidence that many policies that are intended to help American workers have actually harmed many, if not most, of them. These policies include discrimination laws, minimum wage laws, overtime laws, predictive scheduling laws, “ban the box” regulations, forced unionization, and other labor market regulations.

Discrimination laws. The Age Discrimination in Employment Act (ADEA), enacted in 1967, seeks to protect workers aged 40 and older from being forced out of jobs, discriminated against in hiring, or treated differently for promotions and pay due to their age. All states except South Dakota supplement this with their own age discrimination laws, with some state laws being stronger than the federal statute.

While these laws might dissuade firms from firing or overlooking older workers simply because of their age, they also create legal and financial risks for employers hiring older workers in the first place. For example, those most likely to sue (older males in high-status professional jobs) could extract greater severance packages from companies. The threat of litigation makes older workers less attractive to hire, on average, particularly because it is more difficult to prove discrimination in the hiring process than after termination.

Research shows that this risk is real and significant. Most notably, Lahey (2006) found that white male workers over the age of 50 in states with strong age discrimination laws were less likely to be fired but also less likely to be hired; they also worked fewer weeks per year and were more likely to be retired than in other states.⁹ She concluded that these laws make companies “afraid to fire older workers,” as expected but that the laws also induced firms to seek to avoid this litigation “by not employing older workers in the first place.” Neumark and Button (2013) found similarly that the Great Recession harmed older workers more in states with strong age discrimination protections.¹⁰ While some scholars contest these empirical findings, there’s enough evidence to suggest that age discrimination laws may protect certain insiders who already have jobs to the detriment of older workers seeking them.¹¹

There’s also evidence showing that other, more contentious, discrimination laws might have even bigger effects on the hiring prospects for those affected, since most older workers are likely to voluntarily leave the labor market sooner than these other groups anyway. For example, the Americans with Disabilities Act of 1990 (ADA) offers similar employment protections for the disabled. Older research by economists Acemoglu and Angrist (1998) found that “the ADA had a negative effect on the employment of disabled men of all working ages and disabled women under age 40” due to reduced hiring.¹² These effects were stronger in states that had seen more ADA-related discrimination charges.

Minimum wage laws. All levels of American governments interfere directly in pay setting for low-wage workers. There is a federal statutory minimum wage of $7.25 per hour; 30 states have higher minimums, and some cities and localities go even further. New York City, for example, has a $15 minimum wage, while Seattle has the highest in the country, $17.27 per hour, for most employers. Given these laws, the average effective minimum wage across the United States was already almost $12 per hour back in 2019.

Minimum wage hikes are arguably the most studied policy issue in economics. As a result, one can find varied results about the impact on jobs, depending on the level of the minimum wage hike, the scale of the increase, the length of the time period examined, and the industry or population under the microscope. Overall, most of the literature finds that raising the minimum wage creates “disemployment” effects—that is, less employment or fewer hours worked. Raising the cost of labor, in other words, tends to result in fewer people being employed over time, primarily through reduced hiring.¹³ These effects are especially pronounced for young and unskilled workers.¹⁴

Larger minimum wage hikes tend to have bigger negative effects on employment than smaller ones.¹⁵ Studies that look at the aggregate impact on low-paid workers also tend to find bigger negative employment effects, whereas those that cherry-pick certain industries, such as restaurants, find smaller results.¹⁶

Past federal minimum wage increases hit hardest in states where the local minimum wage did not exceed the federal wage floor. Research from Clemens and Wither (2014) found that the 2009 hike even lowered the income growth of the target workers in these states. The increase in hourly pay was offset by “employment declines, increased probabilities of working without pay (i.e., an ‘internship’ effect), and lost wage growth associated with reductions in experience accumulation.”¹⁷

Newer research shows that not all employers will cut employment, hiring, or worker hours in light of minimum wage increases. Yet other ways they might adjust to these cost increases may also hurt some workers. Fast-food outlets, restaurants, and childcare providers, for example, have been found to pass a portion of the minimum wage cost increase onto consumers through higher prices.¹⁸

These price hikes can reduce some of the benefit of a higher wage rate if they occur on goods or services that minimum wage workers purchase.

Evidence also suggests that employers sometimes cut other nonpay benefits at higher minimum wages, including the generosity of health insurance benefits, workplace amenities, or other perks.¹⁹ International research finds that firms facing higher minimum wages seek other ways to manage their labor costs, such as offering workers less predictable schedules.²⁰

Some companies react to minimum wage hikes by seeking ways to improve the productivity of their workforces. This is often not costless for workers either. It might require replacing inexperienced low-skilled employees with more experienced, higher productivity employees; making longer-term investments in labor-saving machines; or pushing existing workers harder. These all either reduce opportunities for low-skilled workers in the longer term or make workers’ experience at work less pleasant.

None of this is to deny that minimum wage increases benefit the workers who are fortunate enough to keep their jobs and hours. But policymakers must acknowledge that these laws come with big trade-offs and that the costs are often borne by young or unskilled workers who are looking for entry-level positions, are regarded as more dispensable by employers, and have the most to lose from fewer employment opportunities. In 2007, Neumark and Nizalova (2007) found that workers who were paid high minimum wages when they were younger worked less and earned less even in their late 20s. This effect was especially strong for black Americans.²¹

Overtime laws. Employees covered under the federal Fair Labor Standards Act, which goes back to 1938, must receive 1.5 times their regular pay for any hours worked over 40 per week. Numerous exemptions to this federal requirement exist, including for salaried workers who have “executive, administrative, or professional” duties and have an annual base salary of more than $35,568.

Originally envisaged to stop exploitation and even to boost employment (by sharing work between more workers), these laws have harmed workers in important ways. A 2020 Institute for Labor Economics study shows that because overtime regulations increase compliance costs and create additional financial constraints on how employers might operate most cost-effectively, they reduce net employment and hours worked.²²

To manage the additional costs and restraints that overtime laws bring, moreover, some companies avoid paying overtime rates by adjusting base pay or redefining work roles for workers earning near the exemption thresholds.

Research has found that there are 89 percent more salaried “managerial” positions around the threshold, with position titles including “coffee cart managers” and “lead reservationists,” suggesting there is substantive “overtime avoidance.”²³

Thus, overtime laws might help some workers get modestly higher wages but at the cost of less-efficient schedules for them and fewer jobs or hours for others.

Predictive scheduling laws. Predictive scheduling laws generally force employers to disclose anticipated schedules for employees in advance (usually within two weeks’ notice) and strictly limit an employer’s ability to change those schedules. Some versions include mandatory rest periods between employee shifts and require overtime pay if a business changes an employee’s schedule after the notice period has passed. Although these laws were initially adopted to provide more certain schedules for workers in the retail and restaurant industry, where fast-shifting demand can lead to sudden changes in the need for staff, they have been expanded in many jurisdictions to cover other industries.

Although predictive scheduling laws are still in their infancy, Oregon has recently become the first state with a blanket regulation and is joined by several major cities, including the San Francisco metropolitan area, Chicago, Philadelphia, and New York.²⁴ Overall, the result has been a messy web of regulations for businesses to navigate and draconian penalties on employers for perceived violations.

Because predictive scheduling laws raise costs on employers who change a worker’s schedule, managers have unsurprisingly found it more difficult to calibrate staffing levels with staffing needs. Thus, to avoid making large losses at quiet times, businesses have cut the number of workers on shifts that are expected to have uncertain demand. In fact, research published by the Institute for the Study of Free Enterprise in 2022 suggests that these laws have corresponded with a 9.2 percentage point increase in part-time workers from 2014 to 2020 in the retail and restaurant industry.²⁵ Workers themselves attributed more than two-thirds of this increase in part-time employment to involuntary causes such as an “inability to find full-time work” or “unfavorable business conditions,” rather than noneconomic reasons such as “childcare issues” or “family obligations.” More evidence suggests that businesses affected by these laws respond by offering less flexibility with employee schedule changes, scheduling fewer employees per shift, and offering fewer jobs overall.²⁶

“Ban the box” regulations. Ban the box regulations (BTBs) are intended to expand work opportunities for ex-convicts by delaying the point at which employers can ask job applicants about their criminal history. These BTB statutes, which started in the 1990s, are now widespread. Four-fifths of the U.S. population currently reside in a jurisdiction with some form of these laws, and other expansions are in the works.²⁷

As discussed in the Criminal Justice chapter, boosting the employment prospects of Americans with criminal records is a worthwhile objective, given the barriers they currently face in the labor market. Unfortunately, however, BTBs appear to be harming many vulnerable American workers. In particular, employers left without a straightforward method to determine an applicant’s criminal history frequently turn to other proxies, such as screening for race or ethnicity, to minimize the risk of hiring a former inmate. Thus, Doleac and Hansen (2016) showed that low-skilled black and Hispanic men are less likely to be employed in jurisdictions with a BTB law.²⁸ White job applicants are significantly more likely to receive a callback than black job applicants after the passage of BTBs.²⁹ These laws also can lead employers to lobby for and utilize other means of screening applicants with criminal records, such as occupational licensing.³⁰

Forced unionization. The National Labor Relations Act (NLRA), which has been in effect since the 1930s, makes it unlawful for an employer not to bargain with a union that has majority worker support, while also granting that union the sole representation rights for all employees. This exclusive representation provision means that governments are forcing certain employees to be represented by a union to collectively bargain for them, even when the individual worker may not desire such representation.

The act is explicitly based on the idea that employees face an inequality of bargaining power with employers, something that the law seeks to correct by providing collective bargaining opportunities from independent unions—that is, unions that have no connection with the company’s management. As such, the law entrenches an adversarial labor model. It explicitly bans individual company unions in which a firm might deal with its own union worker representatives who might better enhance the collaborative prospects of labor and management. The act also promotes union security, the principle under which workers who are represented by a union can be forced to join or pay dues to it, to ensure the union’s survival.

Clearly, the NLRA has become less problematic over the decades, as union membership has declined to just 6.1 percent of private-sector workers, down from 36 percent in 1953. These days, 28 states also have right-to-work laws, which prohibit employees from negotiating contracts in which nonunion members are forced to pay for the costs of union representation. The development of the gig economy and other flexible forms of work further makes the law an anachronism in the modern economy.

However, 22 states still lack right-to-work laws; the NLRA’s regulatory burdens are still significant; and many policymakers are working to expand the law’s scope through reinterpretation or new legislation. For example, some appointees at the National Labor Relations Board (the federal agency tasked with enforcing labor law) broaden the conception of “concerted action” to prevent employers from fully responding to employees’ unwelcome speech or workplace histrionics.³¹ A proposed Protecting the Right to Organize Act, meanwhile, would abolish state right-to-work laws and attempt to redefine gig workers and independent contractors as employees, ensnaring them within applicable state and federal labor laws. At other times, progressive groups have pushed for the criminalization of employers who might have unwittingly sidestepped vague labor rules, and previous Democratic administrations have attempted to make companies liable for breaches of labor and employment law committed by their franchisees or contractors.³²

All these factors increase risks for employers, dampening their propensity to hire and encouraging them to locate in right-to-work states or even other countries.³³ Furthermore, most analyses of private-sector unions and collective bargaining arrangements find that, although unionization can generate a shortterm wage premium for union-covered workers, a union presence reduces job growth at the firm level.³⁴ Unionized firms also tend to struggle with maintaining investments in capital or research and development, thus harming productivity and lowering wages in the longer term.³⁵ The presence of a union also changes the composition of the employed workforce, with older and higher-paid workers tending to leave the firm as younger and lower-paid workers join.³⁶ More recently, Kini (2022) shows that unionization can also harm consumers, for example by increasing prices or decreasing product quality.³⁷ Laws and regulations that encourage or mandate a big union presence thus tend to reduce job opportunities, on net, while favoring insiders at the expense of all other workers.

Other labor market regulations. Governments regulate labor markets in other ways that also harm American workers. For example, as analyzed in the Employee Benefits chapter, government-mandated benefits enforce certain types of benefits for workers, distorting worker remuneration in a variety of ways. The federal Davis–Bacon Act commits federal construction projects to pay prevailing wages for workers, often meaning union rates at significantly higher cost, to the detriment of minorities and taxpayers. As discussed in the Independent Work chapter, restrictions on contract or gig work, such as those in California’s Assembly Bill 5, reduce workers’ scheduling flexibility and hours and reduce employment in the knowledge economy.

The Policy Solutions

Deregulate labor markets to improve American workers’ employment prospects

Given the demonstrable benefits of labor market mobility for American workers and the problems caused by various labor regulations, policymakers should return to respecting Americans’ freedom of contract and employers’ right to employ at will—that is, being able to terminate work relationships for any reason. Doing so will ensure that the labor market is as dynamic as possible, provides the greatest opportunities for higher wages and levels of employment, and meets the widely varying needs and desires of all American workers.

Having freedom of contract as the lodestar of labor law would require repealing many of the labor regulations that currently prohibit agreements or decisions that employers and employees might reach in free negotiation. Doing so would inevitably be disruptive, and even harmful, for some workers in the short term, but government interference in the labor market brings net economic harm, while benefiting some insiders at the expense of far more outsiders (who tend to be young and unskilled workers with the most to lose). Many of these regulations, moreover, hurt many of the same workers they are allegedly intended to help, in turn preventing better employer-employee job matching and thus worsening productivity.

In terms of specifics, age-based discrimination laws should be repealed, and other discrimination laws should be reassessed due to their potential unintended consequences. Policymakers also should scrap minimum wage laws entirely, or— where doing so is politically impossible—hold the dollar value of minimum wages constant (so they become less significant in real terms over time) and resist any large federal minimum wage increases, which would particularly harm people in lower-wage, rural areas and many young or low-skilled Americans. Policymakers should repeal overtime and scheduling mandates, which reduce workers’ job security, hours, and, often, their preferred work arrangements, while also making businesses less productive. They should also water down the worst aspects of the anachronistic, adversarial National Labor Relations Act or repeal it entirely: in general, federal law should neither encourage nor prevent employers and employees from agreeing to unionize their firms’ workforces as they see fit.

Finally, state and local BTB laws, which risk stifling mutually beneficial job matching between businesses and workers without criminal records, should be repealed and new laws should be avoided. Instead, as discussed in the criminal justice chapter, governments should pursue expungement to improve employment outcomes for Americans with criminal histories. Companies that have voluntarily instituted BTB, such as Walmart, Target, and Koch Industries, can of course maintain those policies. This would avoid the unintended consequences created by BTB mandates because these firms do not desire to know applicants’ criminal histories (and thus will not use racial or other proxies to determine them).

Labor-related regulations detailed in other chapters, such as those on independent work and occupational licensing, should also be reformed as recommended there.

Action Plan

Although intended to help American workers, many labor laws and regulations often hurt them and create unnecessary hurdles to employers and employees as they attempt to d velop mutually beneficial workplace relationships.