Feature Article: Remove hiring, firing and minimum wage laws that cause unemployment

It’s that time of year again when thousands of matriculants and graduates flood the job market, eager to start earning money and start creating a life of their own. Sadly, the laws are stacked against them.  Every piece of legislation that could possibly be devised to deter employers from hiring any of SA’s unfortunate 7.5 million unemployed and under-employed people is on the statute books. And more are being added. When will government remove the barriers to entry so that people can make up their own minds what wages and conditions of employment are acceptable to them? When you have nothing, isn’t a job, any job, better than having no job at all?

In the monograph Unjustifiable dismissal – the economics of an unjust employment tax: The New Zealand Employment Contracts Act, published by the FMF, Professor Charles W Baird described the negative consequences that flow from laws and regulations that prevent at-will termination of employment contracts by either party.

New Zealand (NZ) between 1984 and 1991 moved from being one of the most heavily regulated to one of the least regulated economies in the OECD. In 1991 the country adopted the Employment Contracts Act (ECA), as part of large-scale reforms that included privatisation, deregulation of product markets and international trade, abolition of subsidies to producers, and deregulation and decontrol of financial, foreign exchange and capital markets. As a result of the liberalisation programme, two decades later NZ is considered to be the freest country in the world, from civil liberties to economic freedom, according to a study recently released.

Adoption of the ECA allowed for increasingly flexible labour markets. The long tradition of national wage fixing and arbitration was replaced by decentralised contracting, freely negotiable between individual employers and unions. Unionism became voluntary and freely negotiated contracts became the norm. Working days lost due to strikes declined from an average of 519,000 in the seven years to 1990 to 38,000 days in 1994. Australian economist, Wolfgang Kasper, reported in 1996 that the regulatory changes had resulted in fewer strikes, increased productivity in many sectors and a 40 per cent decline in unemployment between 1993 and 1995.

Unfortunately, according to Professor Baird, the government introduced unjustifiable dismissal provisions into the ECA at the same time. In the FMF monograph, Baird elaborated on the detrimental effects of such laws. Given the general liberalisation in other areas of the NZ economy, and the increased overall flexibility of the labour market, the dismissal provisions did not have the kind of effect they have had in SA, where the laws have had devastating consequences. Professor Baird’s elaboration of the negative consequences of unjustifiable dismissal, otherwise known as employment termination procedures, when applied to this country, explain why we have such a shockingly high and enduring unemployment rate.

Professor Baird demonstrated that onerous dismissal procedures have highly negative consequences for employers, employees and the unemployed. The reason is that legislation containing unjustifiable dismissal provisions imposes what he describes as an ‘unjust employment tax’ on employers. As a consequence, any country that adopts legislation containing stringent dismissal procedures cannot avoid having lower wages and higher unemployment rates than would be the case with contract-based or mutually at-will termination procedures.

In order for economic activity to function properly the interactions between the participants need to occur on a voluntary basis. All parties to a contract must either own what they wish to exchange or they must be acting as the authorised agent of the owner. In employment contracts, workers own their labour and employers own the job. There must be consent, in that the parties must agree with each other: no forced bargaining can result in a voluntary contract. All parties must be in a position to walk away from any proposals they do not like. No fraud must be committed. A deliberate lie cannot bring about a voluntary exchange. In a voluntary employment contract the parties agree on termination provisions, including what would constitute unjustifiable dismissal. If legislation imposes unjustifiable dismissal provisions on an employer and employee, they are prevented from contracting voluntarily.

The consequences of the “unjustifiable dismissal tax” are lower average wages than would otherwise be concluded. In a study conducted by Vedder & Gallaway in the USA, the unjustifiable dismissal tax imposed on employers was calculated to be 8.79 per cent, of which 7.47 per cent was borne by employees in lower wages, while the balance increased the employers’ marginal cost of hiring by 1.32 per cent. Increased cost of hiring leads to the employment of fewer people. In the study, the researchers calculated that in California alone, the introduction of unjustifiable dismissal legislation led to the loss of an estimated 171,000 jobs.

Vedder & Gallaway found the effects of unjustifiable dismissal legislation on employee income to be cumulative, increasing income inequality (Gini coefficient) year by year. In their ten-year example the inequality would have been 10 per cent lower on the lowest quintile mean family incomes in the absence of the legislation, reflecting that the cost falls most heavily on the lowest income employees.

If minimum wages are instituted, the problems of low income and unemployed people are multiplied. Minimum wage laws render workers unemployable at wages lower than the statutory minimum. That they would be prepared to work for lower wages becomes immaterial because employers are open to being charged with an offence for paying less than the statutory minimum. We have the inexplicable situation that otherwise compassionate people would prefer to see the poor remain unemployed and their children go hungry rather than to support their right to work for any wage that they find acceptable.

Minimum wage laws impact most heavily on the lowest-skilled, youngest, oldest and longest term unemployed people in the country. Due to the implementation of minimum wages, opportunities for on-the-job training decline, as do the fringe benefits offered by employers. If a significant differentiation is not made between wage rates in rural and urban areas and between other low-wage and high-wage areas of the country and sectors of the economy, unemployment in the poorer areas rises, further increasing levels of poverty.

Professor Baird described the economic effects of unjustifiable dismissal legislation as:

  • Less efficiency in the management and deployment of labour resources.
  • Higher information costs in labour markets.
  • The founding of fewer start-up firms and the expansion of fewer existing firms.
  • The hiring of fewer high risk employees.
  • Diminished opportunities for entry level work and on-the-job training.
  • Decreased productivity of many already-hired employees.
  • Lower real compensation paid to workers.
  • Less employment opportunities in general.
  • Increased inequality in the distribution of income.

Anyone who contends that the laws do not cause unemployment must prove it. Exempt a high-unemployment area from the laws for a guaranteed minimum of five years and let us see the result. I would predict a spectacular reduction in unemployment and thousands of matriculant’s hearts filled with hope and optimism for a rewarding future.

NOTE: Next week’s article will relate these principles to the current farm worker strike in the Western Cape.

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 Foundation.

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