Income Redistribution: A Change in Direction

First Published: 2000-07-29

The labour bills that have been tabled by the Government and debated in Parliament include some needed refinements of exiting labour law. But more importantly they go beyond. They implement entirely new control regimes that include a costly national labour contract and an occupational health and safety program.

To put this into perspective this article will first discuss economic growth and the changing face of socialism.

Economic growth.

Economists like to talk about two things… How a country spends its money and how much there is to spend. Or… How is the economic pie divided and how does it grow.

In this regard the last half-century created an analytical field day. There was the recovery of Japan and Germany from total devastation, the economic emergence of the Pacific Rim countries, the unanticipated sustained growth of the United States and both technological and structural change that can only be described as massive. At the other extreme there was the collapse of the Soviet Union and the Communist Bloc. Here the totalitarian centrally planned and centrally controlled economy proved to be a catastrophic failure. All of this has been thoroughly analyzed. Economists know a great deal about what works and what does not.

A good illustration is a March 2000 study “Growth is Good for the Poor” by David Dollar and Aart Kraay of the World Bank. They studied the link between income of the poor, the bottom fifth of the population, and overall income in 80 countries over 40 years. They found that-

  • The income of the poor rises one-for-one with overall growth… a one-percent change in overall growth is matched by a one-percent change in the income of the poor.

  • The poverty-growth relationship does not change.

  • The income of the poor does not fall more rapidly than overall income during economic crisis.

  • The effect of growth on the income of the poor is no different in poor countries than in rich ones.

  • Policy-induced growth is as good for the poor as it is for the overall economy.

The study confirmed most of what had been previously identified by economists. There is a core set of factors promoting growth… namely… macro stability, fiscal discipline, openness to trade and the rule of law.

The point is–

If you are interested in the poor, you should know that economic growth really counts.

The changing face of socialism.

While Russia and the Eastern Bloc were disintegrating as a result of inefficient economic management, the European Union founded in 1957 was moving in the opposite direction. Although it took time, the business/labour partnering solution that developed in some countries was extended to the rest of Europe in the 1990s as were the mandated labour benefits and regulations. The only temporary obstacles to this process were the Margaret Thatcher and John Major governments of Great Britain.

Classical economic theory concludes that minimum wage legislation, mandated employment terms and health and safety regulations increase unemployment.

This appears, in fact, to be the case in Western Europe. For instance, measuring employment by using the number of people employed as a percent of the total population (the Employment-Population Ratio), male employment declined materially over a 15-year period in France, Germany and Italy. The male employment ratio dropped from 4 to 5 whole percentage points for men of ages 25 to 54 and from 5 to 17 whole percentage points for men of ages 55 to 64.

In evaluating the legislation, the employment results and its probable causes, two prominent English economists conclude that–

“The net effect of employment protection and analogous rules on labour demand and supply does seem to be lower employment, greater and longer unemployment for some, and, implicitly, a decline in the speed with which labour relocates from declining to growing sectors of the economy. To this extent, the favourable employment and unemployment development in the U.S. would appear to owe more than a little to its lower degree of employment protection.”

The point is-

European style labour legislation lowers employment and diminishes growth.

The FNM-s growth record.

The Bahamas has had 6-years of prosperity… and particularly in the last 3-years, economic growth adjusted for prices greatly exceeded the population growth. This record of growth contrasts sharply with the economic stagnation that characterized the prior decade.

The FNM Government set a course of improved government efficiency, infrastructure investment and the encouragement of foreign investment. Getting Sun International to build Atlantis was the key and this triggered other investments in tourism, banking and real estate.

But their success went beyond this. The FNM Government attracted two entirely new industries in Freeport, ocean freight transshipment and cruise ship repair. In this regard the Bahamas was a smaller scaled version of Ireland in the 1960s when that country induced the leaders of the computer age to invest in the Irish Republic. This fueled their spectacular growth.

The point is-

The Bahamas got on the road to becoming the most prosperous Black Country of modern times.

The labour bills.

So it may come as a surprise to the reader that the Prime Minister should make labour market regulation what some describe as his “legacy”. His logic, however, is very clear. He stated in Parliament that-

  • Business has benefited from the boom, and

  • “Now is the time for the worker to get his share of those benefits”.

He hopes to accomplish this with the Minimum Wages Act and the Employment Act that together constitute a de facto National Labour Contract.

Let-s pause for a moment.

Few people are aware of the Dollar and Kraay study. Few may know that policy-induced growth is good for the poor. But every businessman who hires Bahamian labour knows that the worker has shared in the good times. Wages and fringe benefits are up and on-the-job training improved. There is full employment.

One can speculate on the motivation for making this policy decision. But it is clear that with the help of the International Labour Organization the PM has tabled a legislative program that closely follows that developed in Continental Europe. And… that program has its origins in Article 118 of the Treaty of Rome that created the European Union. It called for close cooperation between member states in “such matters as labour legislation and working conditions, social security, health and safety, employment. and collective bargaining.”

It is also clear that the National Labour Contract, as we now know it, will raise labour costs substantially. The change in working hours alone for firms that need five and one-half and six-day workweeks will raise their direct labour costs 17 to 27 per cent. This does not include the increased cost of maternity leave, sick leave, vacation pay, related clerical work and the reduced managerial efficiency caused by the greater complexity in managing labour.

The point is-

With the proposed labour bills the FNM Government is changing policies. It is concentrating on dividing up the pie rather than growing it.

The conclusion is–

This will mean less employment and reduced economic growth.
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