the review – 2 of 1999

First Published: 1999-07-15

Rhetoric and Reality

The proposed Minimum Labour Standards Bill… specifically the December 1998 draft… is intended to help the worker. This is an admirable objective. The problem is that such legislation often has significant unintended consequences. The difference between the promise of this legislation and the actual results is the cost or price paid by society for its political illusions.

To illustrate this point let us look at the provisions in the Bill that raise labour costs.

The minimum wage.

The Bill grants the Minister of Labour authority to fix a minimum wage of not less than $4.12 per hour.

The businessman is concerned primarily with his own profit and will hire labour if the value produced by that labour exceeds its cost of employment. Yes… there are exceptions but these are short-term and limited. According to Dr. Walter Williams, the economist, "the first fundamental law of demand, to which there are no exceptions, says – -When prices rise, people tend to buy less, and when they fall, people tend to buy more… Labour services are not different.-" There is no concrete data that contradicts this conclusion… no one has repealed the "law" of supply and demand as it applies to labour services.

The Institute-s survey covered 40 companies in 13 distinct lines of business. Five percent or 109 of the 2,132 workers covered are paid rates (including commissions) below the proposed minimum. They worked in multi-store chains selling fast food and household goods and three gasoline retailers. It is these companies that will have to make the adjustment to the minimum wage in the Bill.

Severance pay.

Under the Bill any employee who is dismissed because of redundancy or natural disaster or is laid-off or kept on short time is entitled to and the employer is liable for a severance payment. The rate is 4 weeks pay for each year of service up to 33 years of service. It is due —

  • If the employer has ceased, or intends to cease operations, or

     

  • If the employer-s requirements for work have ceased or diminished or are expected to cease or diminish.

The Institute-s survey of severance pay practices showed an extreme variation. In addition, the Bill-s 4 weeks provision is two to four times the current levels in 95% of the companies.

The severance provision has other consequences that businessmen readily perceived. If the Bill is passed, it will —

  1. Create a specific legal employee claim against corporate assets and place this claim ahead of the shareholders and on a par with the creditors.

     

  2. Require a financial reserve if accepted accounting principles in the Bahamas change to follow the practice of other countries.

     

  3. Diminish the real value of the enterprise and the willingness of bankers to lend.

     

  4. Will likely trigger labour litigation… and possibly bankruptcy… when business is bad and reduce the incentive to expand when business is good.

A severance pay provision of the type in the Bill is exactly the labour "benefit" that reduces business flexibility, restrains economic growth and increases unemployment.

The businessman-s response.

The Bill, in effect, changes costs that will trigger managerial responses. Some of these are as follows:

  • Fire low-skilled workers presently earning less than the minimum.

     

  • Become more selective in hiring… using more formal applicant screening techniques including lie detector and psychological tests.

     

  • Hire more temporary or part-time employees and reduce the number of full-time employees.

     

  • Mechanize and use labour saving machinery.

     

  • Change to self-service and eliminate full-service retailing.

     

  • Hire more experienced people on fixed-term employment contracts that explicitly exclude a severance provision.

     

  • Use over-time employment rather than hire additional full-time workers.

     

  • Operate the company on a smaller scale or forego expansion because labour management is now more critical.

     

  • Move all or a part of the operations to other countries where the costs are lower.

Unfair dismissal.

There are many provisions that have been addressed publicly. One that is particularly corrosive of sound labour relations is the Bill-s concept of "unfair dismissal."

The Bill further alters the ability of an employer to dismiss an employee for just cause. It does not restate the common law basis for summary dismissal… namely, theft of property, disobedience, misconduct, negligence and incompetence. Instead it creates the right of the employee not to be dismissed unfairly. It relates "fairness" to the employee-s capability, qualifications or conduct and to the "reasonableness" of the employer-s actions. That action must be substantial and must depend on the circumstances including "the size and administrative resources of the employer-s undertaking."

The contrast with the old common law is significant. One can steal but the employer-s actions must meet a test of reasonableness. It is not difficult to see how this language erodes the ability of managers to manage effectively.

Industrial Tribunal Lotto.

Furthermore, the employee may go to the Industrial Tribunal where the judge may order the employer to compensate the employee for all lost income and benefits. Also… the judge may order the employer to reinstate or re-engage the employee at the employee-s option. And… if the employer does not comply, then the judge may make a compensatory award not to exceed $100,000.

The net effect of these provisions is to reduce the effectiveness of the conciliation process and increase the number of labour grievances. The employee has a bigger incentive to play "Industrial Tribunal Lotto"… to nurse one-s grievances, claim victimization, get a lawyer, refuse to compromise and go for the big bucks.

Bureaucratic weight.

The Bill creates two new government bureaucracies: one to inspect and process the disputes related to the labour provisions and the other to deal with occupational health and safety. Both will have the authority to inspect, examine records, take statements and require full cooperation.

The direct weight of government on the businessman and ultimately on the citizen will increase significantly as two new bureaucracies justify their existence and work to guarantee their futures. This weight will reflect not only the desire to secure the benefits enumerated in the Bill for the employee… but also… and unfortunately… the "rent-taking" objectives of individual inspectors.

Unintended consequences.

The intent of the Bill is to help the worker. This is an admirable objective. Ironically, the likely negative effect of such legislation can be perceived simply by reading the Bill. The evidence that such insights are correct can be seen in the effect of such legislation in other countries. Throughout the world such legislation has produced less employment without greater security… the unintended consequences of compassion going astray.

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