As Chapter 1 explained, governments of the 1960s and 1970s became increasingly worried about the economic implications of labour law. They were concerned about the contribution unions' wage demands made to inflation, and about the impact of strikes on productivity. These concerns remained relevant in the 1980s, and a new one was added: that labour law might be contributing to high levels of unemployment. The Labour government has seen labour law in a different light: as a means of promoting productivity and competitiveness.

These developments in government policy have been paralleled by a growing interest among academic labour lawyers in the use of economics perspectives on their subject. In the 1980s, for example, the government drew heavily on the arguments of economists who favoured ‘free markets’, in which regulation by labour law would be kept to a minimum. Some labour lawyers responded by showing that not all economic analysis pointed in this direction: that there is also a significant school of thought which views labour law as one of the ways in which the government can help firms to become more successful. Later chapters of this book will explore the competing conclusions reached by economists on a selection of topics in labour law.

But all of this can seem rather daunting to lawyers with no background in economics. The purpose of this chapter is to demystify the subject by explaining some of the basic concepts economists use, and their application to labour issues. The first section will give a very brief account of the central core of economics: the subject's methodology and assumptions. The second section will examine microeconomics.