Instinctive Blunders: Job Protection and Redistribution

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.