Application: Employment law

We can also interpret the model of product liability in the context of labour markets and employment regulation. In the context of employment law, workers are now suppliers of the product (labour services) and firms are the "consumers". Suppose that there are L identical workers (where we normalise so that L = 1), each with a reservation wage of ®. Each worker supplies either one unit of labour, or none. Workers have no bargaining power: they must accept the wage that is offered to them.

Firms are all identical and earn profits of R -Ю from employing a worker (where R is the firm's revenue), and nothing if they do not. Firms maximise their profits. A competitive equilibrium in this situation is where each firm maximises its profits, and workers choose to work at the firm which offers them the highest wage.

Suppose first that jobs are completely safe - workplace accidents do not occur. In the competitive equilibrium, firms offer workers a wage of ю, which workers accept. Welfare is R -ю .

Now suppose that jobs are unsafe. The key modification that we now introduce into our previous model of product liability law is to assume that both workers and firms can affect the expected level of harm to workers.

To this end, suppose that for each unit of labour that a worker supplies, there is expected marginal harm of H(Xj, xv), where xi is the level of care per unit of labour provided by firms, and xv is the level of care per unit of labour provided by employees. Let wi and wv be the marginal costs of care for employers and workers.

The efficient levels of care here are characterised by the usual marginal conditions: care should be provided by both parties up to the point where the marginal benefit per unit of care supplied equals the marginal cost. This means that:

and

We will assume that at these efficient levels of care, it is still efficient for firms to hire all of the workers, so that

Let us now examine legal rules in this setting. First, note that if workers and firms can negotiate directly over the level of care that each provided, then using Coasean-type reasoning, any legal rule will be efficient. However, in the absence of the usual Coasean preconditions, legal rules will matter for efficiency. The easiest way to see this is to analyse three different legal rules.

 
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