Feature article: High levels of job security and inflexible labour laws cause unemployment

17 March 2016
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Instead of considering national minimum wages intended to raise the wages of people who already have jobs, government should be giving its full attention to creating conditions that will lead to an increase in the demand for labour. Raising the minmum wage and making it applicable nationally, cannot fail to increase unemployment.

High levels of job security have costly consequences

Labour laws that increase the job security of those already in employment cannot avoid interfering with the contractual rights of both the unemployed and potential employers. If that were not so, there would be nothing to prevent job-seekers from contracting freely with firms on mutually agreeable terms. Given unrestricted freedom of contract, no one should be unemployed other than those who are holding out for higher wages or better conditions.

Onerous termination requirements, minimum conditions of employment, compulsory minimum wages and other regulatory conditions imposed on employers, all serve to consign some people to the ranks of the permanently unemployed. This is because the sum total of their wages and the costs to the employer of complying with the labour regulations exceed the economic value of their expected production.

Compliance costs include the time required to understand the legislation and to implement and maintain the administrative processes needed to avoid contravening the laws, and the potential executive time, professional fees and other costs related to an inadvertent contravention.

Small firms and complex regulations
Many small firms are incapable of dealing with the complexities of regulations and respond by refraining from hiring staff. Compliance costs are similar for high-wage and low-wage employees, which means that they constitute a greater percentage of the total cost of employing low-wage workers. They are therefore a greater deterrent to the employment of unskilled than skilled workers.

Wealthy countries tend to adopt more demanding labour laws than others and the detrimental consequences become increasingly visible over time. Even highly developed European countries are finding that they can no longer afford onerous labour laws and comfortably provide social grants (the dole) to the resultant unemployed. Germany, well known for its ‘labour democracy’, has revised its its labour laws in an attempt to reduce the cost and level of unemployment.

Inflexibility of labour laws
South Africa’s labour laws are as inflexible as those of Germany, France and Italy, and considerably more inflexible than those of the United States, United Kingdom, New Zealand and Chile. Hong Kong, Singapore and Taiwan, by comparison, have greater freedom of contract in their labour markets. Comparisons of levels of inflexibility have to be viewed in context, in light of circumstances prevailing in the countries being measured, and taking into account that effects vary according to the strictness of enforcement. For instance, whereas South Korea’s labour laws appear to provide job security at a similar level to that in South Africa, the consequences are very different because South Korea has weak labour unions and the laws are not strictly applied, while South Africa’s unions are politically powerful.

According to the International Monetary Fund (IMF), South Africa’s labour laws are not more inflexible than those of the Organisation for Economic Co-operation and Development (OECD) countries . However, that does not mean that they are appropriate for our circumstances. For one thing, South Africa has an appreciably higher number of unskilled and semi-skilled people than the OECD member states. Since the administration and labour law compliance costs of employing an unskilled worker can be equal to or higher than the costs of employing a skilled person, employers tend to hire skilled people in preference to the unskilled. In this way, regulation creates a serious bias against the employment of the unskilled.

Regulatory bias against the employment of low-skilled workers
Countries such as South Africa that have many low-skilled job seekers usually also have large numbers of existing and potential low-skilled employers, who do not have the capacity to administer and comply with the requirements of complex labour laws. Inflexible labour laws then have a doubly retarding effect on the employment of labour: not only do they price unskilled people out of the labour market, they also prevent low-skilled people from becoming employers. Relief for both employees and employers at the lower end of the South African job market could consequently bring about both a significant reduction in unemployment and an increase in the number of labour-intensive firms.

Author: Eustace Davie is a Director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the FMF.  

 



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