Labour laws deny freedom of choice

The International Monetary Fund (IMF) report on South Africa has again included criticism of the country’s strict labour regulations, claiming that these laws exacerbate unemployment and impede overall economic growth. In response, South African labour union Cosatu has once again criticised the IMF report, arguing that there is little evidence offered to support the claim, and pointing to similar labour laws in many European countries unaccompanied by high unemployment rates.

Both of these positions argue only about the macro-level effects of labour laws and overlook the real impact that is taking place at the individual level. Look below the abstract arguments of whether or not South Africa’s labour laws are adding to the unemployment problem or limiting economic growth and the real effect of these laws becomes apparent: they deny individuals freedom of choice.

Strong economies are built on the free choices of individuals. Each person makes decisions based on what they like and dislike, what is most important to them, what they hope to accomplish in the future, and how they prefer to spend their time. Based on these preferences, each person is best able to determine for him or herself where to work and for how long, what to buy and how much, whether to save, borrow money, invest in education or training, stay in one place, or move to another.

The aggregation of all these different individual choices is what makes up the economy – it explains why the resources of time and money are allocated the way they are. Based on these individual choices, business owners and managers decide things like: whether they will make cheaper or higher quality goods, specialise in one thing or many things, pay employees to create their products and run the business, or buy capital – that is, machines, computers, and such things to do the job.

The freedom of individuals to choose becomes constrained when governments try to arrive at a different outcome. This could be because politicians agree that people cannot decide what is best for themselves and therefore force people through laws to “choose” what the politicians think is best for them. Or alternatively, because certain groups with political power do not like the aggregate outcome of the choices people are making, and exert pressure on legislators to enact laws that limit the choices of businesses and individuals to something that will provide more benefit to themselves.

In the case of labour laws, minimum wages, government mandated benefits, and restrictions on working hours all take away the freedom of individuals to make employment decisions for themselves. When the government steps in and doesn’t allow the wage to go below a certain price, companies are unlikely to continue to employ just as many workers at a higher wage. Some workers will be better off because the government mandate will provide them will higher wages. But many more individuals will be worse off because they will be denied the choice to work at all. Even if they would have been prepared to accept a wage that is lower than the imposed minimum wage, they are prohibited from doing so. Someone else has decided for them that they are better off unemployed, or working in the informal sector than they are taking a lower than minimum wage.

The problem is that the aggregation of individual choices, when they are constrained by laws that limit those choices, is no longer based on what each individual and business wants – it is a distortion.

When businesses decide between labour and capital in order to makes their products, they base the decision on the cost of each. When companies start “capitalising,” that is, replacing labour with capital, it is usually an indication that labour has become very expensive – that individuals are able to turn down lower wages because they can earn more by doing something else.

When labour becomes expensive, capitalisation is a good thing – it reduces costs and frees up labour to be more productive elsewhere. But if hiring employees has become very expensive because of laws that raise the price of labour, rather than because of the choices of individuals, the consequence is to make people artificially unemployed. This is what is currently happening in South Africa.

This is not to suggest that giving people the freedom of choice is without drawbacks or undesirable consequences. Unrestricted labour laws will mean that people who are now employed will face greater competition and lower salaries. Some people may not agree with the choices of others and with the aggregate outcomes. However, people must be given the choice to decide for themselves what wages and conditions of work are acceptable to them if the large number of currently unemployed South Africans are to get jobs.

Author: Susan E. Anderson is an economics graduate fellow at The Mercatus Center at George Mason University, USA. She is a member of the Enterprise Africa! research team, a joint project being conducted by the Mercatus Center, Free Market Foundation and Institute of Economic Affairs, funded by the John Templeton Foundation. This article may be republished without prior consent but with acknowledgements to the author. The views expressed in the article are the author’s and are not necessarily shared by the John Templeton Foundation or the Free Market Foundation.

FMF Feature Article / 27 September 2005, Policy Bulletin / 12 May 2009
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