Man has some instinctive reactions to events
that shake one's belief in genetically selected behaviour being favourable for
the survival of the species. When caught by a storm in open country, his
instinct is to seek cover under a tree, which is precisely the thing he must
not do if he is weighing one outcome against the chance of a much worse one.
Would he rather get wet or be struck by lightning? Experience over countless
millennia should have taught him the way lightning mostly strikes, but
apparently his instincts have not learnt the lesson. Likewise, when he is
pushed, man's reaction is to push back. Though his best defence would be to
pull the pusher on and use his very momentum to bring about his downfall. To
say man learns this by taking judo lessons, if he learns it at all, is only
part of the answer. Perhaps genetic selection of the behaviour best for
survival should have taught him over countless millennia to use judo to defend
himself. While the individual's instincts seem to lead him to blunder some of
the time, government's "instincts" lead it to blunders much of the
time. One very grave blunder it never avoids—a blunder denounced in this column
more than once over the past few years—is to tighten the labour code and pile
on ever more draconian job protection measures when unemployment is high and
looks like staying high.
There are two rival views about what a job is
and ought to be. One is liberal and symmetrical, seeing labour as a service
that is freely bought and sold as a matter of contract between the provider and
the user of the service. The other is social and sees labour as a particular
relation in which the employer becomes responsible for the employee who, in
turn, owes him some service. The relation is not symmetric; the employer has
fewer rights and more responsibilities than the employee, and this is only just
because the two parties are unequal in resources and needs.
The liberal contract provides for an
indefinitely repeated series of services by the one and payments by the other
party. Either party has the same freedom to terminate the contract, usually
after due notice. For a variety of reasons including paternalism, genuine
sympathy for all but especially for long-service employees and as a matter of
sound business practice that values the fostering of loyalty and good will, the
liberal employer will often do for his employees more than the contract obliges
him to do, and such generosity is the more likely to be repaid as it is not a
contractual requirement but an expression of decency and generosity. The social
labour contract is more inclusive than the liberal one and imposes obligations
on the employer that under the liberal contract he might or might not undertake
voluntarily. Fringe benefits being contractual, they do not generate loyalty
and good industrial relations as they do when they are given voluntarily.
Moreover, the legislator intrudes so massively into the employer-employee
relation that the contract becomes a three-party one. Vital aspects are not
mutually agreed, but fixed by the government in its eagerness to protect the
employee. Fixing the minimum wage, the "legal" work week and the
"legal" retirement age are such aspects. They are popular for being
"socially just" but they do the same kind of harm to the economy as
the legislated rigidity of any price. They harm it to a greater degree because
they are among the most important of all prices.
However, no government participation in the
fixing of the terms between employer and employee is as destructive of jobs as
job protection. The idea that the employer is somehow responsible for the
future of his employee—the notion that underlies the rule of lifetime
employment by the same employer—implies that hiring and firing are not
symmetrical. The pain and damage that firing does to the employee must be
compensated by such bounties as the severance payment, the extended period of
notice and the securing of alternative employment, and under some legislations
even the subjection of the firing to the approval of a labour court. The
severance payment may vary widely over and above a "legal" minimum.
It has been estimated that the cost of firing an
employee may average two year's wages of a semi-skilled male factory worker.
Michel Sapin, the minister of labor in the new socialist government of France
has recently promised "to make firing so expensive that it will be as good
as prohibiting it".
Accepting, for want of a more precise average,
this figure as the cost of discharging his responsibility for his employee's
future, an employer must reckon that hiring a person for an indeterminate and
uncertain period would cost him this person's wages for any given period plus
severance equal to two year's wages divided by the probability of the eventual
need to fire the person at the end of that given period. The sooner the need may
arise, the more expensive it is to hire him. This expense would be attenuated
if the severance payable would vary inversely with the length of service, but
in any case it would be a tough obstacle to taking on a new employee. The
sensible thing would be to hang on to all old employees until they retire
voluntarily, and to hire nobody afresh. The net effect of job protection would
then be great job security for those entrenched in their jobs and no jobs for
those, mainly young people, who are looking on from the outside.
This goes some way towards explaining both of
the most depressing features of the European employment picture: a persistently
high average unemployment rate hovering just under 10 per cent, a historically
exceptional level, and within this an even more exceptional youth unemployment
rate ranging from 20 to near 50 per cent that is between the scandalous and the
incredible and should drive young people to despair and destructive madness.
Fortunately, these unbelievable high rates of
forced idleness need not be believed. In a recent book,1 we learn that not counting in the under-24
young labour force those who are either at university, at training courses or
otherwise engaged, so that the number of actual job-seekers is reported as a
percentage of those who either do or could search for a job because they are
not otherwise busy, over states the unemployed as a percentage of their age
group. Correcting, in this way, for the over statement the young unemployed in
Spain are not 49 per cent, but only 19 per cent—still scandalous, but not
apocalyptic.
Be that as it may, it is clear enough that if an
employer must calculate his expected cost of employing an additional worker,
not the worker's wage and social insurance, but in addition also a risk factor
made up of the severance and other costs of getting rid of the additional
worker should the need arise to do so, unemployment of both the young and of
adults will be higher than it would be without job protection. Providing for
the cost of overcoming job protection is an integral part of the expected cost
of additional employment. The government's knee-jerk reaction of intensifying
job protection when unemployment rises—an instinctive blunder—will only
increase unemployment further and make it more persistent.
The other major instinctive blunder of
government is more long-term and acts at a deeper level. When income inequality
increases, as it has done in recent decades as hundreds of millions of East and
South Asians were drawn into the labour market and their output into world
trade, public opinion was shocked that profits were racing ahead while
semi-skilled and unskilled wages at best stagnated. The knee-jerk reaction of
governments was to "correct" by intensifying redistribution from rich
to poor, notably by spending more on education and health care and by not defusing
the pensions time bomb that would have required the ratcheting up of the
pensionable age in line with rapidly rising life expectancy.
Without the rise of these various entitlements,
after-tax profits and the top slice of "earned" incomes would rise faster,
as would the share of saving compared to consumption. Capital accumulation
would accelerate. Eventually, it would outpace the rise in the world labour
force due to the rush of Asian villagers into urban factories. As
infrastructure the world over improved and capital equipment per worker grew,
the world income pendulum would be swinging back from profits to wages and from
a very unequal income distribution towards a less unequal one. This, in effect,
would be the strongest long-term mechanism for lifting the unskilled and the
underemployed out of poverty. It is this spontaneous mechanism that the
instinctive blunder of busily hurrying to redistribute income is so perversely
destructive.
Footnotes
1. Steven Hill, Europe's
Promise: Why the European Way is the Best Hope in an Insecure Age (University
of California Press, 1st edition 2010).
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