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New Institutional Economics and the Substitution of Legal Infrastructure: How Global Hiring Platforms Reorganize Employment
On the surface, companies that provide global hiring solutions via remote workforce placement will appear to be a technology-based solution for HR management. However, looking at these companies through the perspective of New Institutional Economics makes more sense. It is based largely on the studies conducted by Douglass North regarding how institutions act as the “rules of the game” for all forms of economic activity. These companies are not just providing workers the opportunity to work at home; they provide companies with the ability to comply with legal requirements (institutions) to conduct business internationally. In this way, these companies create new types of institutional structures to replace old national and fragmented legal systems, which has enabled new types of global employment opportunities and devleloped new methods for HR management. This is an advancement in institutional innovation—not simply HR software.
Institutions as Constraints on Economic Exchange
According to the New Institutional Economics, economic results will depend not just on the technology and preferences, but also on the institutions (laws, regulations, conventions, and enforcement methods) that exist within a jurisdiction. Employment may be viewed as the most robust and institutionalized type of transaction. When an employer hires an employee, many legal obligations arise — e.g., for compliance with employment laws, withholding taxes, making social contributions, providing benefits, and performing the Termination processes. The nature and extent of these obligations differ throughout the world.
For several decades, the differences among the various institutions created effectively insurmountable barriers to trading in labor markets. Even when technology enabled firms to provide remote employment, the obstacles associated with adhering to local laws proved to be unmanageable due to the fixed costs associated with establishing a foreign subsidiary (i.e., tens of thousands of dollars and months' worth of legal work), which rendered small-scale or experimental hiring infeasible.
What Is Really Being Sold
Global hiring platforms—often referred to by generic phrases like Borderless AI—are disruptors in this space, providing a solution that goes beyond fulfilling the need for access to talent. Instead, the solution offered through these hiring platforms is a complete institutionalised means of hiring employees in foreign countries and taking responsibility for:
- compliance with local employment laws
- payroll taxes and tax withholding
- social security contributions and mandatory benefits
- contract structuring and termination procedures
For companies operating internationally, these services streamline multiple, complex institutionalised systems into a single globalised solution, allowing firms to interact with each country through one private intermediary rather than navigating numerous distinct legal systems.
Substituting Private for Public Institutions
Markets are not dependent upon worldwide agreement about labor laws. Global agreement on labor laws has been unsuccessful both politically and practically. Rather than waiting for this agreement to occur, markets have created intermediaries that help manage the diversity of labor laws across countries, which echoes earlier institutional substitutes, such as the way international shipping companies standardized customs documentation between multiple countries or how credit card processing networks established similar rules for handling transactions.
Legal platforms such as Deel and Remote set up and operate legal entities in many different countries. They are able to do so because they distribute fixed compliance costs over a pool of hundreds or thousands of clients through organisational economies of scale. Compliance costs that would be prohibitively expensive for one organisation to absorb are virtually negligible when they are shared across multiple clients through an intermediary like Deel or Remote.
Economic Forces Driving the Model
This model has developed for a variety of reasons. First, demand for remote workers has increased significantly. After 2020, surveys showed that in developed economies, more than 25% of professional jobs could be done remotely, either part-time or full-time. Second, the complexity of regulatory compliance has continued to rise. Employment protection rules, employment tax filing requirements, and worker classification standards have become increasingly intricate, creating a sustained need for firms to comply with multiple legal frameworks.
Finally, significant wage differentials persist between countries, particularly between North America and less developed economies such as Eastern Europe and Latin America. In software development, annual earnings in North America can be up to four times higher than in parts of Eastern Europe and Latin America. These large wage differences create a strong incentive for companies to find ways to overcome institutional barriers that regulate employment and recruitment practices, even if doing so requires hiring an intermediary to facilitate the recruitment process.
Ramifications for Firms and Workers
Legal infrastructure is a major driver of increased competition in the global labor market. Smaller companies can now hire people from other countries without having to make a large capital investment. This gives companies more flexibility and allows them to scale up their operations more quickly.
On the worker's side, there are positive and negative effects associated with increased competition in the global labor markets. On one hand, workers now have greater access to international employment opportunities, which can increase their wages compared to local market options. On the other hand, workers who rely on private companies to find jobs may lose their connection to labor protections provided by their home countries or local union agreements. The intermediary can be an extremely powerful entity, determining the terms of a worker's contract and resolving disputes related to a worker's employment.
Broader Institutional Implications
In general, this trend presents a number of major questions regarding both sovereignty and how work is regulated in many of the countries with national labour laws in effect. Private platforms now have the ability to effectively enforce national labour laws and this has resulted in the enforcement of those laws being done via contract-based mechanisms instead of via public institutions. The existence of private platforms does not mean that all institutions have ceased to function; however, they are providing a means of replacing national institutions with standardised alternatives (i.e., private platforms)
Conclusion
In conclusion, New Institutional Economics demonstrates that the rise of global hiring platforms is due to the lack of institutional cohesion; they are therefore a rational adaptation to the current reality. Global hiring platforms represent the equivalent of a large number of national legal constructs; by allowing for borderless hiring, global hiring platforms effectively reduce the costs associated with cross border business transactions. What many view as "borderless hiring" is really an indication of a restructuring of institutions which will alter the functioning of labour markets worldwide.
