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Wednesday, July 28, 2010

The case for a different labor-market reform - not PELMAR

Read the mainstream economic press (by which I mean The Economist, the Financial Times, the Wall Street Journal et al.), listen to pundits from the establishment's think tanks and international organizations (OECD, IMF etc.) and you always hear the same litany again and again: to grow your economy and create more jobs you must reform your labor market. And the reform they have in mind is always the kind that curtails employee rights and benefits, never employers' - let's call it for what it is: pro-employer labor-market reform (PELMAR). With the current economic crisis, which has thrown millions of workers out of their jobs in the developed world, it is time to stop and ponder. Is this medecine the adequate one? Does it guarantee any success? Has it been responsible for increased worker participation in the labor market in the past? How does it dovetail with our Western notions of social progress?

So desperate are the current times that here in Spain (20% unemployment rate), a Socialist government has decided to abandon one of its tenets of employee protection (something not even its conservative predecessor dared consider) and reform its labor market in the sense demanded by the conventional wisdom: relaxing rules on firing employees in the hope that it would encourage companies to hire more easily. The logic is impeccable: if I can fire 'em when I want, why not hire 'em when I want? Before you jump to the conclusion that there is no other solution, it's good to look at the past. When I lived in Spain 15 years ago, unemployment was even higher than now (23%) and yet neither the Socialist administration of Felipe Gonzalez nor its conservative successor under José Maria Aznar embarked on PELMAR, even though European Commission, IMF and World Bank reports all encouraged them strongly to go through the same tired old song of making life even more miserable for employees (but brighter for the bosses) in the hope that more jobs would be created. Well, the next decade and a half saw Spain growing tremendously and the unemployment rate go down from 23% to 8%, even better than France. And this without any PELMAR, with employee rights maintained as intact as before. Now, you might say, OK, Spain is a one-off case, the exception that proves the rule, coincidence is not correlation or causality, they were just lucky.

Well, let's cross the Atlantic and check out Brazil, a country I know well since I spend several months a year there. Brazil's labor rules and regulations are even more stringent than Spain's: many employers consider it a nightmare since, once hired, an employee is almost unfirable (or, to be more accurate, it is costly to do so), and if you do and are taken to court in 90% of cases the labor tribunal will rule against you. And yet, Brazil's unemployment rate has been coming down steadily for the past decade. Yes, just like Spain, and without any need for PELMAR. 

You want a third case? Well, let's take our pilgrim stick and travel up north, to the world's most powerful and wealthiest country: the US of A, the cradle of PELMAR before PELMAR even existed, corporate paradise and worker hell. Living in the States in the early '90s I was somewhat shocked to see that in the Land of the Free and Home of the Brave people could be fired instantly with or without a cause, that many had no health insurance and had to toil double shifts at two jobs just to make ends meet. Sure, employees could go to court in case of wrongful termination but astronomical legal fees make this option all but an impossibility for most workers. Of course, you could (I dare not say "can" anymore) get a job not too long after having lost the previous one, but even this cannot hide the pain involved with stressfully looking for a job over the weekend because you were let go on Friday and needed something on Monday. Not to mention that any new job also means a period of uncertainty, adaptation and learning the ropes, making new friends among new colleagues. But at least the US unemployment rate was half that of Europe, so, you might have said, it evens out. Well, not any longer - if ever. With both the US and Europe facing the same economic crisis, the US unemployment rate has crept up to the same levels as in my native France, home of the 35-hour workweek, 8-week paid vacation, universal health care. Who is now better off? The US worker or the French one?

Still a skeptic? Let's look at the UK, right across from France, and yet in labor matters so close to the US. (Only when Tony Blair came to power was a minimum wage finally adopted.) The British unemployment rate is more or less at the same level as France. But, I'll be generous, I'll consider this current figure a statistical outlier and use the figure of better times, say 5% against France's 10% (higher than the current one, but I said I wanted to be generous to my detractors.) Since both have similar labor sizes (let's say 30 million) let's make a comparison. If France were to implement US/UK-type PELMAR (free firing, no minimum wage, little paid vacation, limited unemployment benefits, curtailed employer-paid health care plan, well, the works) it would see its unemployment reach the UK/US ideal level of a jobless rate of 5%. In other words, in the old system 3   millions French employees (10% of the working population) were miserable (because unemployed) but 90% that is 27 million were happy (because employed and protected). In the new, PELMAR-inspired scheme, only 1.5 million (5%) would miserable, but the 95%  (that is 28.5 million) would now be worse off because, sure they still had jobs, but could be fired at a whim, had fewer vacation days, limited benefits etc. What logic is that that in order to make 1.5 million people better off (and there is little doubt that a job, no matter how badly paid, is better than no job at all) we make 28.5 million worse off? The logic that says, "who cares about employees, as long as somebody else  is going to be better off": the employing companies - and the shareholders who hide behind. (Have you noticed how you always hear calls for labor-market reforms, but never for management reform? Although the financial crisis and the ensuing recession, along with the destructions of companies such as Enron, WorldCom etc. were all because of incompetent, dishonest and irresponsible management, governments, who are in hock to, when not in cahoots with, business, will resist every effort to reform management - we are seeing it now with attempts to water down the restructuring of banking management.)

Are we to go back to Dickens' England and child labor and 20-hour workdays? Have we decided against the idea of progress? If yes, then we have decreed the end of democracy, because a democracy is a system where governments arbitrate among competing interest groups in society. Once you decide that the majority must suffer so that a few can thrive, we are straight back to an ancien régime system.    

The examples I have shown from varied countries show that what drives the unemployment rate up or down is the state of the economy, not labor regulations, so there is no justification to engage in PELMAR. I can see some of you smirk and point to other culprits. One would be the state of public finances: "we are broke, can't afford it." Well, have you considered shifting budget resources from unproductive areas such as defense to more productive ones such as education? The G8 and G20 and GXX leaders love to meet on a regular basis in exotic locations and issue platitudes in their final communiqués. Why not for once do something useful and agree that all will reduce their military arsenals by half, thus liberating resources that could be put to better use for PEOPLE. We could thus finally cash the "peace dividends" that have eluded us since the end of the Cold War.

Other skeptics will then point to another culprit by saying, "Can't do anything about it anyway, it's globalization. If your costs are too high, jobs will flow to India and China." Well, not so fast. The globe-trotter and international person I am is the last one to rant against a globalized world. I am for a win-win globalized system where everybody wins, but not for one where the same old types increase their profits and the others are all worse off. I am also instinctively against government expanding its reach with too much regulation (I've always believed that a good government is a small government, if not no government.) But, if anything, the current financial crisis has shown that too little government regulation can create a worse situation.  (There is also a case to strengthen and enforce government rules against bullying in the workplace, the plague of modern business, which is inflicting untold daily misery on millions of employees all over the world.)

Let's not forget that the aim of public policy and economic growth is to enhance PEOPLE's lives. If economic growth is going to come at the expense of PEOPLE then it's time to question this economic growth. So, Yes to a global system where we all trade freely, where good and services and people can move freely, but where basic PEOPLE's rights are protected. And  No to a globalized PELMAR system  that throws us back to the Middle Ages. What next? Rediscovering the beauty of slavery, the ultimate labor-market reform?


  1. Mr Ahmed - This Article in your blog is one of the best I have ever read in any of the blogs. Congrats - You are a person who values People's rights, Democracy, Globalized Win-Win situation to All, Fighting for abuse of employees who are bullied for no apparent reasons and above all holding ethics to highest standard. However, I have to disagree on only one point which is PELMAR even though within PELMAR I agree most of your views. If an employee is not proving up to the mark in the job, then may be we can have a retraining mechanism and warning mechanism and if further, the employee is not meeting the standard, then firing is the only way within PELMAR. Also, the entire globalized world wants to follow American Model of 6-7 once-a-year recession where everything moves down and in that case genuinely, a few companies do not have enought cashflow to run business and have to lay-off employees (even good employees) to close certain divisions/departments who does not have future and in that case, don't you agree that employees has to be laid-off within PELMAR limits. I agree the way in which they are firing in USA is horrible where they say that employee doesn't have skill, employee doesn't have character/morale and et al which are full of political lies and deceit which needs to be curbed. The best way to lay off people is to tell them in a polite way that due to business conditions we are laying off and the companies should help them to find another job through recruiting companies and facilitate a smoother transition during tough times as unemployment for 6 months is good where one can find a job!!

    Anyway, please write a new book about your general thoughts as it's very inspiring and motivating to me to read it from a person who is a proven true globe-trotter!!

  2. Saravana,

    Thanks for your input. I should have made it clear in my article that of course there are cases where terminating an employee makes sense: misconduct, economic conditions or low performance. I agree with you that in the latter case, efforts should first be made to retrain the employee or redeploy them and if that proves ineffective then termination is the only option. I do not believe for a second that business is a charity that should keep deadwood. In the case of worsening economic conditions, when layoffs are inevitable (and here we really have to check whether they are inevitable), then I have nothing against them. But in these two cases (terminating an employee for low performance or bad economic conditions) what is of the utmost importance is that the process be conducted fairly. I have seen too many instances where a reduction-in-force exercize turns into a score-settling excuse whereby some managers get rid of people they don't like or who don't suck up to them or refuse to be bullied. That is UNACCEPTABLE, and government should step in to prevent that. I can see that things are changing, albeit slowly. Even in the US, the state of New York is about to adopt a law that will allow employees to sue their employers in case of bullying or when they are in an abusive working environment. This is clearly a step in the right direction

  3. Dear Mr. Ahmed:
    Interesting point of view as always. Don't you think though that the ideal labour market would fall down somewhere between the European and the American models?

    In defense of the American system,some added flexibility wouldn't do the European system any harm plus there is also the issue of high social security costs which should be lowered.

    Your argument of decreasing happiness in the overall workforce in order to increase hapiness in a smaller numbers of the unemployed is very interesting as long es you can keep the numbers of the employed constant. However, it seems that the number of permanent contracts in European countries is going down and the number of unstable jobs is going up, so some kind of tough medicine may be necessary even to get european unemplyment back to its "normal levels".

    Still, as a full beneficiary of working conditions, I can't argue agaisnt my higher level of happiness.

    What do you think should be done in order to be competitive with countries who have almost medieval working conditions while still keeping our own desirable benefits?