Labor Flexibility - Case Study Example

LABOR FLEXIBILITY Labor flexibility or more commonly known as labor market flexibility has found some staunch supporters in employers around the globe. Employers around the world are of the view that increased flexibility would facilitate economic growth and this would result in more job openings. Changing market conditions are such that they require increased flexibility in order to be able to meet the increasing demands of growing competition. However while employers support and endorse it, labor/trade unions are of the view that such strategies are meant to weaken labor power. They feel that labor flexibility would negatively impact bargaining power of labor and would only increase firm’s profitability. Thus they seek greater protection from increased bargaining power of employers and job insecurity. They argue that insecurity has been consistently increasing due to liberalization, privatization and globalization. It is now important to study the issue within a proper theoretical framework. What constitutes an inflexible labor market? According to Solow (1998), an inflexible labor market is created “if the level of unemployment-insurance benefits is too high or their duration is too long, or if there are many restrictions on the freedom of employers to fire and to hire, or if the permissible hours of work are too tightly regulated, or if excessive generous compensation for overtime work is mandated, or if trade unions have too much power to protect incumbent workers against competition and to control the follow of work at the site of production, or perhaps if statutory health and safety regulations are too stringent” [Solow 1998]. This definition is exhaustive enough but still doesn’t touch upon the important relevant issues of generous severance pay, costly legal battles that are important to study since they form an integral part of job security legislations. Such legislation regardless of the country where it was form would most likely include provisions that increase the costs connected with firing an employee and regulating hiring process. Job termination is not such an inexpensive process. It includes the costs of notification and the money incurred during non-performing period, compensation, legal costs, legal compensation, etc. Due to all these problems, employers might try to decrease the strength of workers but then comes job security legislation, which provides coverage to employees. Even in good economic times, employers might want to hire new workers but may find themselves at a disadvantage because they cannot terminate workers as and when they need. This severely affects a firm’s ability to create jobs and hence the net result may be quite the opposite of what was expected. Firms may find themselves hiring more during recession and less during expansion turning the employment rate upside down. [Heckman and Pages 2000] This theoretical analysis is not conclusive according to Bertola et al 1999; OECD 1999:69 since higher firing costs result in lower hiring during economic expansion while stringent laws restrict firing during downswing but the net result on employment cannot be determined accurately. Labor Flexibility in India and New Zealand Employers in India have the same arguments for reforms as those in the New Zealand or any other developed country. Neo-liberals reflect the sentiments of employers in their arguments against labor market institutions. Legal restriction in this area affect creation of jobs, encourage law violation, facilitate hiring of non regular workers and may encourage bribery etc, they argue. [Basu et al; Zagha 1999]. Employers in India feel that the law, which is affecting restructuring of enterprises in the country, is Chapter V B of the Industrial Disputes Act (ID Act). This provision was inserted during the Emergency of 1975-77 and once the situation was under control, most of laws introduced during the period were repealed with the exception of Chapter V B. Even though the workers opposed emergency itself, they sing praises for Chapter V B which can be criticized for its strict provisions on laying off even when a company is deep in financial crisis. It is often felt that this provision should be removed and removal wouldn’t hurt workers as is often argued. “This is because employers do not invest money only to retrench workmen or close the undertakings” [Bharucha]. It is argued that resources invested in non-performing units can be transferred to other more productive units and this would help in the creation of jobs. Labor protective laws along with trade unions have given rise to ‘labor aristocracy’ which according to Johri (1996:447) “can delay or obstruct all worthwhile change in technology, workload, manning, shift work, etc”. Trade Unions on the other hand have number of arguments to support their stance on the issue. These unions argue that workers must not be laid off even if they are surplus but instead be absorbed in some other section of the firm. However if it becomes impossible to retain some surplus workers, they must be given good compensation and then terminated. [AITUC 1997; Mahadevan 1999a] For trade unions in India Chapter V B “encompasses the right to livelihood, natural justice and transparency” [D’Costa]. Termination compensation is expected to be 50 percent of wages and allowances for the first month and 75 percent for the second month followed by full salary subsequently. In the case of firm’s closure, workers should be able to claim their share and their claims must be settled before other things. Since India does not really offer any unemployment assistance to workers, trade unions feel it is not practical to “give a blank cheque to the employers – government or private, to operate exit policy” [Mahadevan 1999b: 6]. Labor flexibility issue arose when employment generation debate intensified in India during 1980s. In the manufacturing sector in 1970s, jobs had increased for sometime sparking debates over the factors that contributed to job growth. In the unorganized segment of industries, employment was growing during 1980s; while in the organized sector, this was not the case. The organized segment showed positive signs in employment growth in early 1990s while other segments showed signs of negative trend. Production in manufacturing sector grew impressively at 7 percent in the 1980s and this seemed to have negative impact on job growth. Increases in real wages along with job security laws were found to be two important reasons for stunted growth in employment. [Fallon and Lucas 1991; Lucas 1988:189-90]. Increased wage was seen as the result of actions by trade unions and this study also found that without job security provisions, employment would have grown by 17.5 percent in the manufacturing sector during this period. [Lucas 1988:189). But these claims have not gone uncontested as Sudipta Dutta Roy (1998) analyzed important data covering the period from 1960-61 to 1993-94 and claimed that job security regulations could not be held responsible for slow employment growth. She found problems with Fallon and Lucas’ study claiming that their “coefficients on the dummies for job security regulations were negative in only 12 of the 35 industries considered, significantly positive in one and insignificant in the rest” (p 44). The claims made by this study were further supported by various other studies. It was found that increase in wages was not the result of actions taken by trade unions but were based on increased production. [Nagaraj 1994] Slow growth of employment was blamed on poor job creation process witnessed in two labor-intensive industries namely textiles and food [Papola 1994:10]. While we are discussing the situation of labor flexibility in India, it would be important to see how international studies have evaluated the impact of job security provisions on job creation. According to OECD (1999): “EPL strictness has little or no effect on overall unemployment” in OECD countries [Nickell 1997]. EPL might slow down employment adjustment process [Abraham and Houseman 1993]. Nickell and Layard (1999:3063) did not find any correlation between stringent job provisions and higher unemployment. In a survey conducted by [Betcherman et al 2001], it was found that: “The impacts on employment and unemployment levels are modest and, in the case of unemployment, often statistically insignificant… However, the empirical findings are much stronger for the dynamic effects – on labor turnover and job tenure, job creation and job destruction, and unemployment duration – and on the types of jobs created…Overall, rules to protect job security increase the number of stable jobs but at the price of more long-term unemployment and non-participation in the labour force and less opportunity for regular employment in the formal sector. This increases the vulnerability of certain groups of workers including women and youth, and the unskilled or poorly educated...” However again the impact has been evaluated differently. In another study by Heckman and Pages (2000) for Latin American and Caribbean countries, it was found that job security provisions had a negative impact on job turnover. Their research indicates that, “job security regulations have a substantial impact on employment and turnover rates both in Latin America and in OECD countries…” New Zealand offers another interesting insight into the issue of labor flexibility. The country has been trying to reform its labor market by introducing flexibility and this has been the part of its reform plans for more than a decade now. It was found that collective bargaining and labor market flexibility are closely though negatively associated. Labor market flexibility has been a relatively new concept in New Zealand since the job market had been highly regulated in the 1960s and 70s when government policy ensured maximum absorption of workforce. During this time, while unemployment level was very low, the country suffered in terms of international competitiveness and "the creation of an insular, inefficient, increasingly rigid, inflation-prone economy - which proved ill adapted to external shocks and to the challenges and opportunities of a rapidly changing world economy" (OECD, 1990, p. 13). In 1980s, this condition got worse and reached a point of internal crisis. It was found that these labor policies were no longer working and economy couldn’t be sustained with these regulations. This called for wide structural and institutional reforms. The economic changes that were started in 1984 were based on the "New Right" ideology, which redefined the role of state in economic matters. The government saw this as a new policy emerging from international trends promoted by such agencies as the OECD, the World Bank and the IMF (Department of Labour, 1990). This new practice involved abolition of various controls in 1984 including those concerning wage, price, interest rate, credit and foreign exchange. Labor market reforms came around the same time. Historically New Zealand’s labor relations were regulated by state intervention. The Industrial Conciliation and Arbitration Act of 1894 promoted the principle of collectivism in order to ensure a certain level of financial accountability and democratic operation. Conciliation and arbitration were seen as the best approaches to resolve labor disputes. Prior to 1980s, New Zealand has a multi-tiered industrial relations system. For example wage determination process which continued till late 1980s consisted of a number of elements including the national minimum wage; general wage adjustments made by the Government or the arbitration court; awards which set national minimum wages for various jobs; registered collective agreements which set minimum wage rates at the enterprise level; and informal house agreements, setting pay rates for particular jobs at the enterprise level. The collectivist ideology that defined the labor market in New Zealand was seriously criticized for its strict regulations and many sources claimed that this system was "rigid" and had been restricting employment opportunities (Treasury, 1984, p. 235). Such claims were further backed by OECD, which saw the labor market in NZ as the least reformed section (OECD, 1985). Apart from the Teasury and OECD, there were other agencies calling for change including the New Zealand Employers' Federation and the New Zealand Federation of Labour. Due to all this pressure for reform, the government called for policy papers and reports and once these were received, a framework for reform was announced in 1985. Complete abandonment of state intervention was not supported, however some changes were proposed which led to the repealing of repeal of the Industrial Relations Act 1973 and adoption of the Labour Relations Act 1987 (Department of Labor, 1985 and 1986). The Labour Relations Act 1987 was designed to minimize state intervention in labor market by establishing conducive environment in which employers and workers could interact in a positive manner. While some noteworthy changes were introduced, this Act still retained some prominent features of previous legislation and hence the New Zealand Business Roundtable (NZBR) vehemently criticized it;- a body that represents the top executives of NZ major enterprises. National Party Government replaced the Labour Government in 1990 paving way for a new employment Act. This legislation called the Employment Contracts Act of 1991-reformed labor market by moving away from collectivism and adopting flexibility. This Act was based on the same principles that had reformed economic structure in other sectors. The main catalyst for change in labor relations in NZ has been this Contracts Act of 1991 and it has been the main instigator of flexibility in the country. Conclusion: The discussion and case studies of two countries show that labor market flexibility is not only being vehemently demanded, it has become highly essential for continued employment growth. It has been an important subject of debate around the world even though it is a relatively new concept. The differences we notice in the two countries accrue from the fact that they belong to different economic infrastructures and at presently at state of development. India is a huge country but it is still developing and laws are not as effectively implemented or strictly followed as in developed countries like NZ. While we can expect big changes for labor market in NZ due to recent changes in legislation, the same cannot be said of India where corruption and bribery are still major issues and escaping the law is always an option. India will need to completely modify its laws concerned with labor market and then ensure their effective implementation in order to see some positive changes in employer labor relations and in bargaining power of employees. Till then trade unions will continue to have an impact and labor strikes will be frequently resorted to as the only means of effective protest. New Zealand on the other hand is well on its way to labor market flexibility and while state intervention has not been completely abandoned, it has certainly been reduced significantly. 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