Labour

Anyone who has ever been an employee is acutely aware of the asymmetry of power between the employee and the employer. The person who writes the pay check can often withhold it either temporarily or permanently at any time. Except for certain highly skilled workers, market forces are usually on the side of the boss. Few would argue that prevention of child labour, worker safety and a fair wage are not worthy goals of government regulation. Sadly often the only thing that government regulations prevent is employment.

In the United States, local governments have the power to require licenses for people practicing professions. This seems to make a certain amount of sense. It might be in the government’s interest to prevent fake unlicensed doctors or dentists from harming citizens. Although a required full disclosure of competency, or the lack there of, might do the same thing. Still state governments have gone overboard in their definition of a profession. According to The Economist, the “list of jobs that require licenses in some states already sounds like something from Monty Python—florists, handymen, wrestlers, tour guides, frozen-dessert sellers, second-hand booksellers and, of course, interior designers.”

Obviously the purpose of these licenses has little to do with public safety and more to do with limiting competition. By raising the entry costs with licenses that require expensive training or quotas, the workers can defend their turf. In Japan, the number of law students who actually pass the bar exam is less than 2 per cent. This limits the number of new lawyers to less than 3000 a year.

Often these laws limit competition by limiting foreigners. In Saudi Arabia, Saudi nationals are favoured over foreigners. Unlike foreigners, Saudis can be sacked only with great difficulty. But instead of creating jobs, the law backfires, because it is unattractive for employers to hire its own citizens.

Sometimes it is not the labour laws themselves but how they are enforced. Strikes in China are usually quite rare, because local governments dislike any type of social unrest. Recent strikes against Japanese firms were allowed to continue. They serve a double purpose of adding to workers wages and present a convenient target for grievances.

Labour costs in countries such as Cambodia, Vietnam and Laos remain a fraction of those in China, but foreign firms are still a target. Vietnam increased the minimum wage, but only for workers at foreign-owned companies. Taiwanese firms have been the target of labour unrest.

Lengthy procedures to terminate workers also have a perverse effect of creating a two tier labour market. Since it is so difficult to fire people already employed, employers are discouraged from hiring new employees. This has created unemployment among young people of up to 40 per cent in countries like Spain and Greece.

The result of these inflexible firing laws has often made it easier to hire temporary workers who are entitled to fewer benefits and can be easily terminated. In Spain. they make up 30 per cent of workers. Japan used to be the home of life time employment. Now it matches Spain. Temporary and part-time workers have increased from one-fifth to one-third of the workforce.

In India the Industrial Disputes Act of 1947 also made it difficult to hire and fire workers, but it only applied to companies of a certain size. The perverse effect has been to make many Indian companies capital intensive in a country where labor is cheap and limited company size to avoid regulation. So unlike China, India cannot capitalise on what should have been a comparative advantage.

Brazil’s labour laws were originally based on the labour code of Mussolini’s Italy. Instead of a separate law that could be easily amended or changed, some are written into the country’s constitution. Workers have their own labour courts, where a fired worker can get a far greater severance package than one who resigns, sometimes as much as 4 per cent of the total amount the worker has ever earned.

Finally, inefficient labour regulations force more and more workers and employers into the grey market. On paper Spain has an unemployment rate of over 20 per cent, but this is dismissed as fiction. Millions of workers register as unemployed so that both they and their employers can avoid paying social security contributions. Grey economies in emerging markets top 50 per cent of the economy. The result is that there is not only is tax evasion rife, but workers who need the most protection do not get it.

Reforming these laws with perverse incentives would often benefit both workers and the economy. But reform is never easy for the simple reason that there are huge economic investments and incentives for both labour and employers in maintaining the status quo. But crises have their uses. Sometimes change occurs when there are simply no other alternatives.

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