the review – 2 of 1999

First Published: 1999-07-29

The Warning Label

All legislation that is dangerous to a country-s economic health should come with a warning label.

The proposed Minimum Fair Labour Standards Bill… specifically, the draft dated December 1998… is a good example. In this case the government intervenes in what the Minister of Labour of the New Zealand Labour Party refers to as "what consenting adults wish to do with regard to wage rates, periods of notice, severance pay… or job-specific health and safety arrangements." It requires employers to pay a wage or other benefit or provide a condition of employment that it deems fair or just.

The law is a charade unless it causes true changes… and it is hypocritical and duplicitous if it does not state the unintended consequences of those true changes.

The Bill is patterned after legislation implemented elsewhere decades ago. The promise of that legislation and the reality of the outcome should be known by all. Fortunately there is a mountain of scientific work done on the subject and virtually all of it demonstrates that such legislation does not produce what it promised.

Freedom and growth.

Freedom is a big word and economic freedom is not much smaller. To talk about economic freedom is easy… but to measure it and examine its implications is difficult. Two research institutes have done just that and the Institute for Economic Freedom has reported the findings for the past two years.

There is a positive relationship between economic freedom and growth. It is as simple as that… more freedom means more growth and less freedom means less growth. In the past "as freedom declined in the Bahamas so did the annual growth in real Gross Domestic Product per person."

The proposed labour legislation substantially decreases economic freedom; and based on the experience in 119 other countries, it will depress the economic growth potential of the Bahamas.

OECD labour markets.

One of the most widely accepted principles… one embraced even by the International Monetary Fund… is that countries should increase labour flexibility rather than decrease it. In fact, the IMF in its 1998 Report to the Bahamian Government recommended "greater flexibility in labour arrangements." Such policies are referred to in international circles as "second generation reforms."

In 1998 two economists from Florida completed a study of the labour markets of the Organization for Economic Cooperation and Development (OECD). This study covered a 40-year period from 1956 to 1996. The countries were divided into two groups:

  • Centrally planned labour markets. These are characterized by a centralized wage setting process, unemployment pay, mandated dismissal and severance pay and government benefits to the unemployed. This is descriptive of continental Europe, Australia and until 1984 New Zealand.

     

  • Market-directed Labour markets. Wages and working conditions are determined largely by agreements at the company level. All unemployment benefits are smaller in number and scale. The United States, Japan and New Zealand after 1984 fall into this class.

The conclusions of this study are –

  • While unemployment rose in all OECD countries, the U.S. unemployment rate grew up to 1980 and declined thereafter. In Japan the rate grew steadily; but at 2.7% in 1996 it was the lowest in the OECD. The centrally planned markets that started below Japan in 1956 and were 10% to 21% in 1996.

     

  • Increased benefits to the unemployed increase the incentives to remain unemployed and raise the long-term unemployment rate.

     

  • Unemployment in southern Italy is three to four times higher than in northern Italy. The minimum wage rates acceptable to northern industry are much too high for southern Italy creating much higher unemployment levels there.

     

  • Changes in labour markets from centrally planned to market orientated ones can produce significant improvement in economic growth and employment. Great Britain and New Zealand are good examples of this.

The businessmens survey.

Two economists, one from Harvard and the other from the University of Bonn, took a different approach. As reported by The Economist in its February 6, 1999 issue they used surveys of businessmen and economic data over a seven-year period ending in 1990. The logic of this approach is that businessmen ought to know how job-security rules affect their business. The study used complex statistical techniques to construct a numerical index of labour market flexibility.

The study concluded that labour-market inflexibility does increase unemployment. For instance, France had a flexibility index 41.7% below that of the United States and an unemployment rate of 10% versus 6% for the United States.

The label.

The proposed Labour Bill dated December 1998 clearly would establish in the Bahamas the type of legislation that has had serious adverse consequences elsewhere. Countries have already moved away from it with good results. It is at odds with the consensus of international lenders and advisors.

If this Bill is proposed, it should prominently display a warning label…

This law is dangerous to employment!

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