Governments - Incentivise employment

Every government in the world says one of its biggest priorities is to create jobs. And yet, very often, they do precisely the opposite. Governments, and policy makers, do not normally get it as to how to create jobs. A shining exception is China – no government in the world comes even remotely close to China when it comes to job creation.

How should governments stimulate job creation. By helping in all of the areas covered in this series – by favouring the manufacturing industry, by not adding burdens on to labour cost, by not putting insurmountable barriers to labour flexibility, by creating the right skilled work force, by investing in infrastructure, etc etc. But governments can directly aid employment too. Here’s (again of doubtful practicality) some prescriptions.

Firstly reduce incentives based on investment and increase incentives based on employment. Remove capital subsidies, investment subsidies, and shift to employment subsidies. Base tax holidays on employment, not investment.

Secondly, enable free movement of labour to areas where manufacturing is concentrated (instead of trying to bring manufacturing to where development has not taken place). Provide cheap housing options in such manufacturing clusters. This has been the key to China’s success. Manufacturing was stimulated in the coastal provinces (especially Guangdong), Because that was the ideal location for plants. Labour moved in from all the interior provinces (especially the hugely populated Sichuan). Shenzhen, a non descript fishing village 20 years go, is now a mega city. And for heaven’s sake jail the clowns who propagate the sons of the soil theory.

Thirdly make state and local governments accountable for number of jobs that are created in their state. Give them quotas for employment generation. Today, the progressive states woo investment. They should woo employment. Again, this is taken from China’s strategy. China woos both, but there are specific job creation quotas for officials and they get promoted based on how well they achieve this.

Fourthly make the salary bill tax deductible by two times the salary, for all wages paid to workers of below X dollars. Thus there is a tax incentive to employ lower wage workers, which is where unemployment hits the most. Fund this out of the reduction in the dole (unemployment benefit, social security, or by whatever name its called) that such a move would surely result in.

Fifthly, the government, as the largest single consumer in any country can use its huge buying power very effectively. Other things being equal, favour suppliers who have contributed to job creation. Make % increase in number of people employed as a criteria in vendor selection.

Governments can do a lot directly to incentivise employment. They have to believe passionately in it. That they will do if they know that they can remain in power (win election in democratic states ; get the favour of the leader in communist ones). Both the electorate and the leader might want to consider moving this to the top in the criteria for deciding whom they wish to back.

From rookie to sophomore

Exactly a year ago a “young” man, I know, made his first blog post – not knowing where it will lead him to, but start, he did. He was, and is, an oddity – in a media which is inhabited by young people, for he is, let us say, skewing the age profile. Today he sheds the rookie tag and becomes a sophomore.

But why blog ? Some do it because its the “in” thing to do. Some do because they have an opinion and want to express it. Some do because they love to write. Some do because they want to connect up with other people. A little of each of this was behind his attempt to write. But it was also for him, a way to read more – for to write, you have to read.

How has a full year of blogging been, I asked ? A wonderful experience, he says. For he has met some incredible people, who he has never seen in real life , but have become close friends. If you had asked him sometime ago as to whether this was possible, he would have looked at you as if you are a little weird – why would you want to trawl the virtual world for friends when you can make them in the real world. But then, he doesn’t say such things these days.

A big bonus , he says, was connecting up with some friends who he had lost touch for quite a while. The online medium does this to people – you can stumble upon long lost friends. And make deeper friendships with people you were only occasionally in touch.

How popular is his blog ?, I asked. He says, he really does not know. Yeah, he does look at the stats once in a while, but he says, like every other blogger, what is most heartening is when he receives a comment. Somebody has taken the trouble to read and then write a comment. No amount of thanks and appreciation, he says, will be adequate for those who comment.

Has he had any regrets ? , I asked. Yes, he says. He is a trifle saddened by bloggers he loved to read and followed, but who sort of dropped off. This is, alas, all too frequent. He is particularly saddened that this blogger, this blogger, and this blogger have gone cold. But he was beside himself with joy when this blogger who toyed with dropping out, came back. Especially since she even remembered that his blog was getting to be a year old and wished him well. He understands that it is tough to remain a blogger and blog actively – its clearly not for everybody. When it stops becoming fun and starts to become a chore, you know its time to get out. But still, every time a nice blogger opts out, it’s a sad moment.

What are you going to do on your birthday as a blogger ?, I asked. He says he gets the best treat he could hope for. He’s going to meet two of his most favourite blogging friends, who he has never met before. Now, how wonderful can that be.

He’s a fairly decent bloke. If you wish to read his blog, you can do so here.

PS – He got a delightful surprise – One of his favourite bloggers whose disappearance, he moaned about, came back here, much to his unbridled delight.

PPS – This blog takes a rest from blah blah on business on Sundays. Has something non businessy instead. The ponderings on job creation will continue next week !

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 ?

Labour pricing - don't score an own goal

One of the most amazing consequences of the recession over the last two years is that, for the first time, employees are willing to accept pay cuts, or even zero pay for periods of time, in order to retain their jobs. Labour has realised (the unpleasant truth) that just like any other factor of production, there is an equilibrium price. Go above it and business will be killed. Its much better to have low pay than no pay. High pay and constant increases are not an automatic entitlement.

This post is primarily for the developed economies where cost of labour is high. Because this has been accepted as a given, manufacturing has inexorably moved to the east, notably China. So the developed world has accepted, without challenge, that their costs will be high and therefore they can do nothing about jobs going away. Such a defeatist attitude is unbecoming of the great innovative cultures they are. Any cost, even labour cost, can , and should, be controlled to keep manufacturing jobs from going away. But how ? Here’s an unpalatable prescription.

Lets take a typical situation – the cost of a worker in a factory is say $ 25,000 per annum. The equivalent cost in a developing country is $ 2,500. Now that’s a huge gap – 90%. While there is no magic bullet, we can chip away at the difference.

Firstly, a significant portion of the cost in developed countries is the social costs that are imposed by the government. Generous pension rules. Unbelievable medical rights (for god's sake, artificial breast implants should not be an entitlement in any medical scheme). The US system of employer paying the medical insurance is a horrible way to drive labour costs up and ensure that manufacturing jobs keep going to China. Retain very basic social costs and remove everything else. Costs are down by 10%.

Employees must work longer hours. No 6 week holiday entitlement. Work five and a half days a week; maybe even six days. Work eight and half hours a day. Another 15% reduction.

Governments must provide an incentive for lower level manufacturing jobs in the form of tax concessions (argued in the previous post). Abolish investment related subsidies (the amount of pork in the US is unbelievable). Channel that money to tax breaks for the low end manufacturing jobs. Another 10% reduction.

Allow inflation to chip away another 10%. Wage inflation in developing countries will always be higher than wage inflation in developed countries. Aspirations rise everywhere – even in the poor world. And contrary to economic theory it will not be nullified by exchange rate movements. Keep wage inflation in developed countries to 0%. In 5 years, you’ve made up another 15%.

The employee should take charge of his destiny and guarantee a 5% productivity higher than in the low cost developing world. By working smarter; not necessarily harder. Write it into the employee contract. Another 5% is chipped away. Give up some “luxury perks” like swank canteen, gym, etc. 5% more goes. And finally exempt them from paying the union subscription. Another 5% gone.

That still leaves a 25 % differential. But that is safe. No company will ship jobs to another country for a mere 25% savings in labour costs. The additional costs of shipping, supervision, risk, etc will outweigh such a differential.

Does this all look like a horrible killjoy proposal ? Capitalist pig being anti labour ? A sweatshop ? For sure it would seem like that to the entrenched employee with a “safe” job. But stand on the outside. Ask the unemployed single mother struggling to find work – any work. Ask the person who’s on the street having been evicted from his house. Ask the guy who’s applied to 436 jobs and got deafening silence, not even the courtesy of a reject letter. You’ll get a very different perspective.

Is this politically saleable ? Absolutely not. But try introducing this with an undertaking that anybody who opts for this is guaranteed a job for the next 10 years. Purely optional. Only in new plants being set up afresh. Whoever wants to take this up can take it up, purely voluntarily.

Try this in El Centro, CA, the town with the highest unemployment in the US. Somehow, I think you’ll find enough people signing up to fill 5 factories.

Manufacturing is key

Manufacturing sector is the key to creating jobs. Not agriculture. Not services.

Agriculture employs a lot of people , especially in developing countries, but cannot create more jobs. Land is finite. Agricultural development will be primarily in improving productivity and output ; not in expansion of jobs. In this sector, policy must focus on efficiency; not on job creation.

The services sector is sexy, but not a massive creator of jobs. For all the growth of the Indian IT industry, the number of direct jobs it has created is probably 1 million. Add the indirect employment and you probably can get 5 million. That is a drop in the ocean of the employment challenge in India. So from a policy perspective, this sector needs to be left free, facilitated to grow, and encouraged, but with limited policy intervention.

The sector that can really boost jobs on scale is manufacturing. This is where policy initiatives must be most active.

What sort of policy initiatives ? Some thoughts, equally applicable to developing as well as developed countries.

Make it easy to open a manufacturing unit. In developing countries it is the problem of land acquisition. In the developed countries, it is the problem of myriad of planning permissions, approvals, fighting green lobbyists, obstructionists, etc etc. (Try setting up a power plant in California). Countries must legislate clearly facilitating easy setting up of plants – a fast track clearing process that must be mandated. In today’s atmosphere of joblessness, the political selling of such legislation is feasible.

Provide a clear incentive based on number of jobs created (not on the size of the investment). This will attract those operations that create more jobs, as opposed to capital intensive sectors. I suggest that, especially for developed countries, this is the most desirable track. For example provide an income tax holiday to employees (thereby lowering the cost of labour) and not to the company.

Develop great infrastructure. Manufacturing units needs perfect infrastructure – power, water, transportation, etc. It’s the job of governments to facilitate building such an infrastructure. This is particularly true of developing countries like India and those in Africa. It’s a fallacy that these are mind bogglingly expensive. Allow private participation and capital will come.

Add to this the other boosters namely labour flexibility, labour pricing and training (all to be covered in separate posts) and you can stimulate the manufacturing sector, even in developed countries.

It’s a myth that all manufacturing will move to the low labour cost countries like China. Firstly, labour cost is only a component of total manufacturing cost and often not the largest component. Secondly China is not the lowest wage country – India for example has lower labour costs; it’s a combination of infrastructure, labour flexibility, productivity, speed, etc that makes China’s manufacturing many times India’s.

But labour cost is an issue. Manufacturing will move to places where the total cost of production is cheapest. Can anything be done about labour cost ? I believe yes. In tomorrow’s post.

THE BATTLE TO CONTROL ONLINE PRICES

The struggle to control prices of digital content sold online continues, with producers and distributors battling over prices for downloads of books and music.

In the latest skirmish, Amazon removed Macmillan books from its website after the company protested that online retail was using monopoly power to force publishers to accept prices no higher than $9.99. Macmillan and other publishers have now signed distribution deals with Apple that allows them to price downloads at $12.99 and $14.99.

Producers, of course, want higher prices because they produce higher revenue and better profits.

The struggle to control prices is not unique to the online environment. In the offline world, producers of books, magazines, CDs, and DVDs have long struggled to gain limited shelf space because there is a large oversupply of products and retailers’ have selection preferences for popular, rapidly selling products.

Large national and retailers have also used their bargaining power to push wholesale and manufacturer suggested retail prices downwards. Wal-Mart, now the number one music retailer in the World, uses its purchasing and sales power to sell large quantities of music at the lowest price possible—the basic price/quantity model for all the products it carries.

What is new in the offline world is that the conflict does not merely involve struggles over the price and quantity strategies of retailers, but that the retailers are using the media content as a joint product with their proprietary digital hardware.

Amazon wants content prices low not merely to sell more books, but because it helps it sell Kindle, its e-book reader. To date, it has been able to do so because it was the leading seller of both products—something it learned from Apple’s strategy with i-Tunes and i-Pod.

Competition in distributing content, even just a little competition, helps shift some of the power away from the retailer and back to the producer. Apple was forced to back away from its enforced price of 89 cents for a download when recording companies made deals with other download providers and threatened to end the rights for Apple to see their popular music. Apple is now playing spoiler to Amazon in the book downloads and Amazon has agreed to carry Macmillan books again.

Newspaper publishers are now seriously testing and considering a variety of e-readers as ways to reduce production and distribution costs. As part of their strategies, however, they would do well to learn from the experience of the music and book business. They need to remember that a basic rule of business is that if you don’t control price, you don’t control your business.

The challenge of job creation

Every nation is battling with this problem – how to create jobs for its people. Growth is all fine, but without jobs, there cannot be real progress. The problem with much of capitalism and economic development in the last decade has been that job creation has lagged behind growth. By definition, this leads to inequality, resentment and ultimately a backlash. The recession last year exacerbated the problem through significant job losses, especially in the developed world.

The single most important economic challenge for nations is job creation. Being unemployed is one of the most demeaning of situations for any human being. A lot of the world’s ills can be attributed to joblessness. Create full employment and hunger will largely go away, terrorism will subside, lifespans will increase, the quality of life will transform and the world will be an altogether nicer place.

But how ? A problem everybody has grappled with for a long time. Some thought socialism was the answer – only to be proved completely wrong (that hasn’t deterred many people from dreaming of it again). Does capitalism inherently not care about jobs ? What sort of policy initiatives would be sensible for nations to undertake.

This blogger strongly believes that the route to job creation is through capitalism. Many learned experts have propounded many excellent theories. I am no learned expert, but blogging is all about airing one’s views, however ill informed they may be. So, with all humility, here are some thoughts for policies that will aid job creation.

Manufacturing is key. This is the sector that has the maximum potential for job creation. Services may be sexy, but doesn’t create the same number of jobs.

Labour pricing has to be sensible. High labour cost coupled with social tariffs by governments is actually more harmful to labour than beneficial. Labour must not price out enterprise.

Labour flexibility is fundamental to job creation. Protecting jobs protects a few and excludes many, Paradoxically allowing companies to shed people, actually creates more jobs. Organised labour just does not get this.

Governments must incentivise employment, as much as they incentivise investment. Today most government policies encourage investment. But they are neutral, or even negative, towards employment.

A massive investment is called for in vocational training. In training specific skills for specific jobs. And efficient reskilling and retraining opportunities for people who lose jobs to be employable elsewhere.

Infrastructure development is a great way to create jobs. Both hard and soft infrastructure. Hard such as upgrading roads, railways, bridges, ports and soft such as education, health care, etc.

Entrepreneurship is a magic bullet. Not necessarily big start ups. The corner store, the self employed artisan, the trader, the maid – these are true entrepreneurs who create jobs for themselves. There are more jobs created this way than in the industrial sector.

Over the next few days, I'm hoping to explore each of these areas in separate posts.