Archive | May, 2014

The moral case for scrapping labour law

One of the most intractable problems encountered by South Africa Can Work in advancing its cause, is political correctness.

Let us make it clear beyond doubt: Our concern is about the poorest of the poor. The weakest of the weak.

It is not complicated. Labour laws are ostensibly designed to protect the weaker of two sides, namely employees as against employers, by reason of their relatively weak bargaining power. Which is all very fine, but for the fact that there are 8 million people in South Africa who are in an even weaker bargaining position than employees, and those are the unemployed.

In our Constitutional dispensation the Court has always insisted on respecting the interests of the weakest members of society. As it was put in the matter of in Hoffman v South African Airways 2001 (1) SA 1 (CC):

“Our Constitution protects the weak, the marginalised, the socially outcast, and the victims of prejudice and stereotyping.  It is only when these groups are protected that we can be secure that our own rights are protected.”

The simple question is: What is the effect of our labour laws on this grouping? For unless it is not only designed to make, but also effective in making, their lives better, how can it be justified?

Firstly, labour laws are designed to protect the employed, not the unemployed. With rare exceptions, the unemployed do not enjoy the benefits of legislatively mandated fair labour practices. Almost by definition labour laws protect the employed against exploitation by reason of their perceived weak bargaining power. This it does by:

  • mandating minimum terms and conditions of employment, including wages;
  • prohibiting unfair labour practices, in particular unfair dismissals; and
  • protecting trade unions and strike action.

Besides that, by reason of their relative place in the market pecking order, the employed are not defenceless. They have an advantage over the unemployed in that:

  • on balance they are better educated;
  • they have the benefit of work experience; and
  • they have more and better work-related skills.

These advantages mean that they have greater bargaining power than the unemployed. Self-evidently the group with the weakest bargaining power is the unemployed. They typically include:

  • previously disadvantaged people, in particular blacks;
  • women;
  • uneducated people;
  • inexperienced youths; and
  • the aged.

These are precisely the kinds of people who our Constitution says must be protected: “the weak, the marginalised, the socially outcast, and the victims of prejudice and stereotyping…”

Labour laws have the effect of keeping precisely these categories of workers out of jobs. As examples see almost all the other articles on this website (http://southafricacanwork.co.za/convincing-american-evidence-that-regulation-kills-jobs, http://southafricacanwork.co.za/the-more-union-members-the-less-job-growth, http://southafricacanwork.co.za/the-effect-of-regulation-on-employment/).

It is not hard to believe. Make anything more expensive – and labour is no exception – and the market will buy less of it.

If that is true, then labour laws fail the moral test by giving an unfair advantage to the employed – the stronger group – over the unemployed – the weaker group. There is simply no moral justification for advancing the interests of the employed at the expense of the unemployed, as labour laws do.

The moral stereotyping of calls for labour deregulation has more to do, one surmises, with the fact that labour deregulation also happens to be good for employers.

Labour law protagonists have two moral problems with deregulation:

  • They find it hard to believe that both employers and employees can benefit from deregulation. They believe that employers can benefit only at the expense of employees.
  • For them the moral puzzle is simple: employers must give up something, to make things right.

It is undoubtedly so that employers will benefit from deregulation of labour. And it would be hypocritical to contend that employers calling for reforms of the labour market, do so out of altruistic motives. When white people called for democracy in 1994, or defended the Constitution in years thereafter, they undoubtedly did so out of selfish motives. But that did not make it wrong. They acted out of what is accurately described as enlightened self-interest. They pursued what is described, in another clichéd term, as a win-win solution. By the same token, when parties negotiate a settlement in a dispute because it has more benefits for both than a costly and damaging court case, no one would suggest that they are acting immorally.

Which of course raises the question: How can employees benefit from deregulation?  Where is their “win-win” situation?

Again, a rudimentary understanding of the way markets work supplies the answer. By making employment cheaper through deregulation, the state causes employment to rise. As soon as that happens, the demand for workers grows, as more and more workers become employed. The moment that happens, employers are forced to offer better working conditions in order to attract sufficient workers and not to lose out to other employers competing for their services. That includes the employed who initially took a dip in employment benefits.

Examples of this phenomenon are not hard to find:

  • Between 1960 and 1990 manufacturing wages in Taiwan, a country with almost no labour regulation and almost full employment, in real terms grew by 5-9% per year;
  • In 1991 New Zealand introduced the Employment Contracts Act, that brought about significant if incomplete deregulation of the New Zealand labour market. Amongst other things, it significantly reduced artificial statutory support for trade unions, and abolished centralised bargaining structures that prevented employers and employees from concluding their own, individual contracts of employment. In the result, between 1991 and 2007 unemployment fell from about 11% to under 4%; during the same period the labour force participation rate increased from 63% to 69%; most significantly, GDP per capita in real terms increased from about $20000 to $30000.
  • In 1985 a worker in Hong Kong (one of the least regulated labour markets in the world) in the poorest 10% of the workforce (precisely the group that labour laws would normally target) would have earned about $1560 in current prices. Today that same worker would earn $7693, a fivefold increase in real terms.

So, employees’ working conditions improve, not despite the absence of labour regulation, but because of it. Even so, one cannot escape the sneaking suspicion that trade unions and other protagonists of labour laws secretly cannot stomach the fact that a freer labour market may have the effect of improving the welfare of employers in the process. Such thinking forms part of the notion that labour law is a type of redress of the wrongs of the past, including apartheid. The laws will not fulfil the purpose these thinkers have in mind unless employers “pay”, or are “punished”, or at the very least inequality is reduced legislatively by forcing employers to spend more to meet legal standards.

First of all, employers are not a uniform group of previously advantaged white capitalists who benefited from apartheid. More than half of employers are black or black-owned, and many white employers are post-apartheid issue. Moral redress by means of labour law simply creates more moral problems than it solves.

Secondly, and more importantly, if we know that the only way to turn around the labour market is to deregulate it, does it really matter that employers’ positions are improved in the process? What would the moral choice be between uplifting both employers and unemployed workers on one hand, and uplifting neither? The choice is clear – the choice that will serve the common good is the correct one.

But what about inequality? In another article (http://southafricacanwork.co.za/the-effect-of-regulation-on-employment) I have shown that, in South Africa at least, inequality of income declines as unemployment does. It is in our interest then to cut unemployment as much as possible, if we are interested in reducing inequality. Inequality will be reduced by reducing unemployment – once again in service of the common good.

The protagonists of labour law display little interest in the common good.

It is time that these exploiters and rent-seekers are exposed for what they are. They are people who use the system of labour laws to oppress the outsiders of the economic world, namely the unemployed. What makes it worse, they do so by calling on a misplaced sense of guilt of the public: The public feel guilty because ostensibly workers are the “underdogs” in society. Well, here’s a newsflash: They are not the underdogs. The unemployed are. And the leaders of the trade unions shamelessly exploit the false perception that employed workers are the true oppressed of society.

But morality is not only about that kind of choice. It also has to do with providing others with choices. And here we think of the unemployed person who would have got a job, but for the current labour laws. By maintaining these laws we deny the unemployed an adult choice, namely whether to accept employment and earn an income for his family, and the humiliation and incapacitation of penury. What is more, we do so on the basis of the assumption that we know better what is good for such a worker, than he knows himself. We deny him the dignity of deciding for himself.

It is a universally accepted legal and moral right that all adults of full capacity have or should have freedom of contract. Likewise, it is now axiomatic that everyone is entitled to equal enjoyment of the benefits of the law. Freedom of contract entails the choice of a worker to accept or reject terms of employment that an employer is prepared to offer. That includes the choice of accepting a compromise in order to compensate for his relatively weak bargaining power by reason of lack of training, education, skills or experience. But by imposing legal minimum requirements for such contracts (such as minimum wages for example), we deny certain workers that choice. In particular we deny that choice to the weaker members of society, those who are unemployed because their bargaining power is too weak to command contracts that comply with labour law. That amounts to outright discrimination against these workers, discrimination on the ground of their socio-economic status, namely their weak bargaining power. To make it worse, it is done in order to improve the position of the stronger set, the employed.

Once we know that labour laws suppress job creation (and how can we not know?) and we do or say nothing, they share in the moral guilt of the rent-seekers.

Morality is about making the right choice when you know what the effects of your decision are. When you dare not say: but I did not know.

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