Is the role of government to maximize social good or individual liberty? I'd rather the latter because the examples of the former are abundant and dreadful. Anyone who thinks this isn't a race to the bottom where lawmakers trade "happiness" for votes at the cost of liberty is lying to themselves. Let's not kid ourselves, a 40 hour work week is not the same as child labor in the coal mines; such laws exist only to win votes. When will it be 20 hours a week? 16? At what point do we descend into the madness that embraced Rome where the role of government became appeasement of the populace to keep them from revolting?
Not everyone wants the same thing in the prisoner's dilemma. The prisoners all want one thing and the prosecutors want something different. If everyone wanted the same thing here, there would be no dilemma.
That's the case with 32 hour work weeks. Employees want them - but employers don't. So there is a misalignment of incentives. And employers specifically have much more power in the situation because there is a significant imbalance in risk between the two. The external mechanism is needed here in order to accommodate and mitigate that power balance.
The mechanism could be legislation, it could be collective action in the form of a union, etc. But it's specifically because not everyone agrees, and the disagreement comes with a power imbalance that the law is necessary.
Thats why it is a good toy example of this issue.
It is a confusing name for it, since in reality there are often mechanism to punish "snitches".
I prefer to think if it as two people wanting to make a trade without a framework to enforce any contract law. You both want to swap your items that are valued more by the other party, but since there's no mechanism to force you to be honest, you're both motivated to steal the other person's goods and not deliver yours. And so you both do that, and the trade doesn't happen, leaving you both poorer.