Tuesday, May 04, 2010

Labor Econ 2: Labor Laws and Employee Forever

May 1 every year is the International Labor Day. Workers in the country and around the world were demanding for higher government-mandated wages, stricter rules against work lay-off and retrenchment, and so on.

Rigid labor laws, or laws that overly protect workers against possible "capitalist exploitation" is rooted in the socialist thinking and philosophy. Since workers do not own the means of production but only their labor and talent, then they are subject to capitalist exploitation and must be protected by the state.

Among the rigid labor laws applied in many countries, in highly welfarist European countries especially, are (a) high minimum wages (even the most unskilled workers should receive this salary); (b) security of tenure, protection from dismissal and lay-off (even if the employee is displaying laziness and declining productivity, or even if the company is losing money); (c) long mandatory leaves with pay (vacation leave, maternity leave, sick leave, etc.); (d) expensive separation pay and retirement benefits; and (e) very high taxes, both personal and corporate income taxes, partly to pay for generous unemployment allowances for the jobless. In short, a policy of "expensive to hire and retire, difficult to fire."

One result of rigid labor laws of a country is high unemployment and high underemployment rates. Many people do not consider this as result of rigid labor laws, but as additional reason to make the laws become even more rigid and more "pro-labor". That is, since unemployment is already high, the more that the government should protect workers from being laid off.

Looking at the other side of the issue, however, people will realize that unemployment is high in a particular country because many employers and businessmen would rather (a) put up their plants and offices in other countries where labor laws are more liberal; (b) hire temporary and contractual workers or job trainees than hire regular, full-time employees, or (c) use robots and machines to do the tasks previously done by people.

Another impact of "expensive to hire, difficult to fire" policy is that many employees are encouraged to become "employee forever" as their entrepreneurial spirit is discouraged. If the laws are stacked against being a businessman and entrepreneur, and in favor of employees, why aspire to be an employer? Why not become an employee forever, get promoted to senior levels and enjoy the benefits of "pro-labor" leaves-with-pay, and generous separation and retirement benefits? Better yet, become a politician or appointed government bureaucrat, and be the regulator of those businessmen, extort some money or personal favour so that you will give your signature and permission as a regulator.

As of the latest labor force survey in the Philippines this year, some 2.8 million Filipinos have no jobs, plus 7.1 million of those who have work are looking for additional work (the “underemployed”), mainly to augment their low income. Meaning almost 10 million Filipinos are either unemployed or underemployed, this is a big number.

Employment is not a right. It is a privilege. Only those who have some ambition, are willing to endure some hard work, and continue to learn new skills, will be able to find work or be able to employ themselves, mainly as micro- or small entrepreneurs.

It is important, therefore, for the government – national and local – to liberalize, not choke, the labor environment so that more private entrepreneurship and job creation will be encouraged. While it is desirable to get a high-paying, well-protected jobs, such may not be easily available, while "low-paying", unsecured jobs may not be glamorous but are easy to find.

The “easy to hire, easy to fire” policy may look heartless, but sometimes it is better in encouraging job creation than the “difficult to hire, difficult to fire” policy. If entrepreneurs will have a hard time firing their lazy and unskilled workers, they would rather hire very few people only and leave many job-seekers to remain unemployed. In a competitive business environment, employers will be forced to give good pay and various benefits to their efficient and hard-working employees so that the latter will not leave them to work in other companies or to become start-up entrepreneurs themselves. And those employees who would otherwise are lazy, will be forced to do their work well so that they will not be fired easily.

Labor laws meant to protect workers from "labor exploitation of capitalism" will be the same laws that will prevent them and their children from being easily hired, the same laws that will restrict them to become independent entrepreneurs and businessmen/women in the future.

* See also Labor Econ 1: What Determines Wage? May 26, 2006

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