Thursday, 4 February 2010

Labour flexibility is fundamental to job creation

In China, when you are employed, you get a fixed term contract. Usually 2 years or 3 years. Even if you are a manager. Even if you are a very senior manager. There is no “endless” employment agreement. And this is ostensibly a communist state. It is not a complete coincidence that in the last 20 years, China has created jobs in the manufacturing sector for some 200 million people.

This blogger might prattle on like an Ayn Rand and is unapolegetically a capitalist. Yet, in his heart, he is a bleeding socialist. Witness the almost pathological aversion to layoffs, as posted here, here and here. BUT ……

One of the biggest myths behind unions and governments “protecting” jobs is that they protect jobs. They don’t. What they actually do is cosset the privileged few and make vulnerable the underprivileged many. The employer simply does not take on “permanent” workers and instead takes on temps, or contractors or part timers or whatever. These get no security of employment, they are often exploited, and there’s often nobody to stand up for them. Or else the employer starts to favour capital over labour as ironically the flexibility he has with stupid machines, is way above the flexibility he has with intelligent people. Any which way, it’s the worker who loses.

We are not talking about those employers who abuse or exploit their workers here. There the law must be stringent and must make no compromises. It’s the flexibility to scale up and down, which is the point of contention.

Take the case of the humble house maid or ayi, or whatever she is called in the developing world. This is one of the most unregulated of labour markets. They are often abused or exploited ( some would argue that they are the subject of exploitation by the maid, but that’s another story !). But such a thriving market exists only because there is freedom of entry and exit. Imagine a situation where once you employed a maid, you could never sack her without a hefty compensation, and only after a lengthy consultative and court process. There isn’t a single housewife on earth who’ll employ a maid under those conditions. A thriving labour market that exists today will come to a standstill. Are maids sacked at a whim ? – sure. Unfairly – certainly ? But at least there is a possibility of getting a job and earning some money.

So here’s another impractical idea. Allow much more freedom to let people go . Legislate a small, but not wild compensation (say 3 months wages). The state then pays another 3 months wages (the dole which many countries already have). Provide a disincentive to companies who get rid of people, without replacing them elsewhere in the country - like a monetary penalty of another 3 months wages, which goes to fund the dole. The state funds retraining of such people, if required ( covered in a post to follow). Create an environment for jobs to flourish, as I have been arguing all week. By doing this, people may get sacked more often. But they are unlikely to be long without a job.

The Indian IT industry employs hundreds of thousands of people. IT companies take great pride in boasting about how many people they have added. Part of the reason is that they are not worried about having to let people go – they have the opposite problem of getting people to stay. Very few employees are really worried about getting the boot; for they know that they can get another job. All this, even though the legal environment is the same restrictive environment where there are draconian permanency rights.

Now wouldn’t it be wonderful when all employers are worried about retaining their people, rather than how they are going to sack them ?


Deepa said...

Another example to bolster your point is the government jobs in India. People fight tooth and nail to get one (especially in smaller towns), and once you have one, thats it. And having dealt with govt. employees very closely during articleship days, I have had the urge to kill many of them seeing the utter disregard and disrespect they show to their work. If it were to be a free labour market like you said, it would have been a different ball game altogether.

The huge unemployment that prevails now is infact because of the theoretical disequilibrium that has set in due to all these factors that offset Perfect Competition. One probably wouldn't have been in a situation of mass-layoffs in a Perfect Competition in the first place.

Of course Perfect Competition is theoretical, and unbridled capitalism is dangerous, but in principle I agree with what you're saying. Its not only fair, it is for a larger good.

gils said...

unemploymentoda actual definition enna?? cant be employed people? or people who dont want to be employed? or people who want job but cant get it? I've seen all 3 cases and all the categories are jobless. In my team there was a requirement. We searched for not one not two..5 months!!! Many turned up..but none got selected because tht specific skill was a niche one and the amount of expertise required was hard to find. Finally the position ended up closed without getting filled. A job lost every aspiring candidate. Read sometime back that the same is happening in Army selection also. Aspiring cadets find the tests too tough to clear so there was a talk to dilute the difficulty level. Implement aacha terila..not even sure if it was a fake or real news. But point is..labour force iruku!! create panniachu..double ok...but are they employable?? antha skill partuku enna panarthu...athukum oru vazhi solunga thalaivary.. suthi suthi educationla vanthu nikkuthu nenakren :)

Vishal said...

This is a tough one to regulate and control for it is such dynamic environment. How employers would take this is a different question altogether. Exploitation should make way for penchant for job creations. Tendency to sack should be replaced by tendency to retain. Very difficult though! I guess!

Ramesh said...

@Deepa - The lower level govt employee is a perfect example of the dangers of job security; no matter what.

@gils - Very valid point. I'm meaning those who are willing and able, but can't get a job when I say unemployment. And its not so much niche jobs, but mainstream jobs - factory worker, office worker, etc. This is where unemployment hits the worst and where mass jobs are needed. And so, so, right - eduction is always the key.

@Vishal - The toughest of them all. Human nature is such that we defend what we have. There's no way we'll allow it to be lost. But the maids market is a great example of what is possible.

Sandhya Sriram said...

its a very valid suggestion ramesh. but i feel a little insecure for all the slightly older people (45/50 +) in the economy doing undifferentiated job and can any day be taken over by a young energetic junior at a definitely lower cost but the very reason the company sticks on with them is because the cost (emotional as well as financial) they will incur in asking these people to go may barely match the benefit on getting a youngster in.

My brain agrees to your views completely but my heart is still not convinced, especially where demand is always lesser than supply in some areas and other way round in some areas and they are not mutually interchangeable

Srivats said...

whoaa only u can think of such topics, i bet u have a list of things to write, why dont u compile these very thoughtful ideas into a book, its really thought provoking and the way you relate to it to various jobs from different part of the world adds all more value to it. I have a firm belief that someday ur words are going to be in print.

Adesh Sidhu said...

Well this is drastic thinking but I am not sure how much it is successful.

Most of US companies have followed this approach but they are also struggling. And labour market in Western countries is not better, Unions or no unions.

J said...

Nice examples of the maid and IT industry. But that also makes me wonder that labor flexibility goes hand in hand with the demand and supply dynamics of that particular class of labor. But that said, I believe that it is human to become a little complacent when you have job security and limited career growth prospects and a 3 year contract might work at least in some situations to solve that problem.

Ramesh said...

@Sandhya - Yes, older people will be insecure if they become high costs islands. But my (heartless) argument is that you cost cannot go up simply because of age. It can only go up because you are taking on higher responsibilities. If you stay in exactly the same job, your salary should be no different than what would be paid if somebody were to be recruited fresh (replacement pricing). I know that is heresey .....

@Sri - Hey thanks.

@Adesh - Contrast the situation in the US with that of say France. US with labour flexibility has comparitively lesser unemployment than France. Joblessness in the US is also the result of high cost of labour and the flight of manufacturing, but if on top of that they had inflexible job markets, the situation would have been a lot worse I believe.

@J - Very right; it does depend on the demand supply equation of that class of labour. Maybe a freer labour market will only work when the dynamics of that class of labour is closer to a perfect competition situation.

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