Thursday, February 4, 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 ?