Labor Flexibility, Legal Reform, and Economic Development

[Alvaro Santos is an Associate Professor at Georgetown University Law Center]

The current global financial crisis has provoked intense criticism of the regulatory framework for financial markets. Financial market flexibility, once considered the key to successful financial institutions and economic growth, has now come under intense scrutiny. In contrast, labor market flexibility is still promoted by scholars and international policymakers as an essential part of the recipe for economic development. I argue that the predominant understanding of labor flexibility is misguided and needs to be revised. To illustrate why, I undertake a critical examination of labor flexibility as developed by a leading World Bank project, called “Doing Business.” I argue that the Doing Business project mischaracterizes countries’ labor regulations by failing to consider the full range of legal sources, surveying mostly the law on the books, and remaining blind to the realities of lack of enforcement and rampant economic informality.

More importantly, Doing Business promotes a binary understanding of flexibility that fails to capture the relational character of legal entitlements. Proposed legal reforms in the direction of “flexibilization” can therefore be both costly and ineffective. As an alternative, I develop a framework which, incorporating insights from comparative law and legal theory, proceeds in two steps. First, my framework undertakes a doctrinal assessment of the respective rights, duties, and privileges of employers and employees in the labor market, and asks whose flexibility is enhanced. Second, my framework pays attention to the link between the formal and informal economic sectors. Using the examples of the United States and Mexico, I illustrate how this new framework can lead to a better sense of the relationship between labor law and a country’s economy, and how this framework can be used as a better map for regulatory reforms.