Monday, October 8, 2007

Regulated Versus Free Labor Markets

I teach a web-based class in human resource management. The class covers most of the traditional personnel material such as job analysis, compensation and employment discrimination. In the section on employment discrimination, I asked the students to participate in several discussion boards about (1) "employment at will, pro or con?"; (2) "affirmative action, pro or con?" and (3) "the regulated workplace versus free labor markets". The last question was taken from the course text by Randall Schuler and Sue Jackson and read:

"Some people feel there are simply too many laws and regulations governing how companies may manage their employees. These people believe that everyone would be better off if we let the free market system work without so much government interference. Other people believe that employees are not sufficiently protected against unfair treatment. They believe that employers would treat employees unfairly if our laws didn't forbid it. Which position do you most agree with? Why?"

The majority of students supported affirmative action; a larger majority opposed employment at will and 100% favored regulated as opposed to free labor markets. To quote three students' comments (they were almost all along these lines):

>"I wholeheartedly do not believe employers would treat employees fairly if our laws did not forbid it. Industry in our country is a business. The bottom line is the more profit you make the more successful the business."

>"I think government intervention, as far as the employee-employer relationship is concerned, is a positive thing. I wouldn’t go so far as to say that, 'employees are not sufficiently protected against unfair treatment', but I would say that if laws didn’t forbid it employers would treat employees unfairly. Government intervention, I believe has proven to be most helpful to employees, in form of regulations/laws/policies."

>"I am glad there is government intervention, if the government rules and regulations did not exist it would be a catastrophe. The EEOC, OSHA and ADEA were created to protect our employees because of unfair treatment to employees. I do believe without the governments laws that employers would treat employees unfairly. We have come a long way but there is still room for improvement because there are still a lot of employers that still break the rules and get way with unfair treatment towards their employees. I do not believe Free Labor Market would help improve the work environment it would just do the opposite. Government intervention is a positive thing definitely not a negative thing."

My response to the class was as follows. Note that unlike the majority of left wing professors, I do not try to suppress the students or give them low grades because I disagree with their views. Rather, I engage in civil debate.

"I enjoyed reading the class's comments and I urge you all to look at what your classmates had to say in the three excellent discussions on affirmative action, employment at will and workplace regulation. However, I must say that I disagree with the majority of students on all three topics, particularly with respect to the regulated workplace. Thus, I do not agree with affirmative action; I do agree with employment at will; and I do not think that employment regulations are helpful to workers. Instead I would argue that workplace regulation is harmful to workers and does not make workplaces more ethical.

While I agree with the argument that affirmative action need not involve quotas and is primarily a means to encourage consideration of previously excluded groups through non-intrusive methods such as advertising in newspapers in neighborhoods where "under-utilized" groups are predominant (this is the traditional description of it), I do not believe that it works that way in reality or that its proponents really believe that it works that way. As Thomas Sowell has ably pointed out in a long list of books, such as his recent "Affirmative Action Around the World", affirmative action, defined as hiring preferences based on race, have repeatedly led to anger, conflict and violence.

In "Affirmative Action Around the World" Sowell traces the implications of affirmative action in five countries, to include India, Malaysia, Nigeria, Sri Lanka and the United States. He notes that affirmative action has often led to extreme resentment and even violence. In Nigeria, the genocide of the Ibo people in the 1960s was largely the result of resentment of affirmative action policies. Likewise, affirmative action policies favoring "Untouchables" in India has done nothing to improve their economic position but instead has tended to help a small, privileged segment within the Untouchable group who would have had access to the best schools and jobs anyway. In turn, resentment against the privileged group has lead to violence against the bitterly impoverished Untouchables not in the privileged category who cannot benefit from the affirmative action laws in part because they live in rural areas where there are no schools or transportation to schools.

Sowell argues that this is characteristic of affirmative action: that it leads to increased resentment and discrimination against the least privileged members of the group that affirmative action claims to help, while it is the most favored members who benefit. But the most favored members of the group whom affirmative action claims to help often have greater advantages in the first place than the majority in society, including the less privileged members of the dominant group (e.g, the white working class in the U.S.) as well as the less privileged members of the group whom affirmative action claims to help. For instance, there are probably no groups in America more downtrodden than the WASPs who live in Appalachia. Yet, they are not helped by affirmative action and in fact are potentially excluded from jobs because of it.

Similarly, in Malaysia laws favoring the "sons of the soil" that amount to apartheid-like discrimination against the ethnic Chinese minority have resulted in the impoverishment of Malaysia. In other words, by excluding highly productive Chinese entrepreneurs, who are a self-made minority in Malaysia, the Malaysian economy has suffered. The Malaysians, who live as a minority in Signapore but a majority in Malaysia, have a higher per capita income in Singapore than in Malaysia. (Malaysia cut off Singapore from the rest of Malaysia because it was primarily Chinese and Singapore is now much more successful than Malaysia.) In other words, the affirmative action policies in Malaysia against the Chinese (in favor of the so-called "sons of the soil", i.e., the native Malaysians) have made the average Malaysian poorer, not richer.

The pattern of unforeseen effects stymies all regulatory systems. Employment at will is another example. In Europe, employees are protected by extensive legal requirements, the so-called social contract. The effect of the "social contract" is to reduce employment and increase unemployment. Britain, which has the weakest "social contract" among the major European nations (excluding the newly free nations of eastern Europe) has seen a massive influx of young French men and women, who cannot find jobs because of the "humane" regulation of the workplace in France. Likewise, the Muslims who dominate the low-income suburbs or banlieue have been excluded from jobs precisely because there are so few jobs. They lead lives of desperation, excluded from the workplace, because of the benign "social contract". The French majority feels very good about how generous it is, but France is a society rife with ethnic hatred and anti-Semitism. The "social contract" is anything but benign.

There are so few jobs in Europe (unemployment is much higher than here) because there is so much beneficent regulation. The riots in the banlieue have gone on for several years, and recently have broken out again. There is so much "ethical" and "humane" regulation in France that it is not unusual for French college grads to fail to find jobs for ten or even twenty years after graduation. Not very humane in my book.

The tradeoff between Europe and America is clear. Where there is heavier workplace regulation, as in Europe, unemployment and the exclusion of unfavored and unlucky workers goes up. In America, where there is employment at will, unemployment goes down and employment goes up. The jobs may not be as good, and perhaps the employees aren't as treated well, but you don't have the social exclusion of large segments of the population in America that you have in "ethical" Europe, a continent whose history is blighted with mass murder as well as the "benign" social legislation of Bismarck.

I wold argue that if most regulation were repealed in the US, then demand for employees would skyrocket. Contrary to what several student claimed, regulation hugely reduces wages. It doesn't increase them.

Wages are determined by the interaction of supply and demand. Wages are an economic phenomenon that are enhanced by a more competitive economy. Deregulation means more demand, which means higher wages.

The best security for all is a competitive economy that is generating considerable innovation and lots of jobs. That can be done in a deregulated, laissez faire economy. The more regulation in America, the more Brooklyn will look like the French banlieue, economically depressed and full of people who cannot find jobs.

Nor do I believe for a second that government is more ethical than business. I do not believe that at all. In fact, the worst crimes against humanity have been perpetrated by government, not by business. The Nazis, the communists, the fascists, the Castros, the Hugo Chavezes have all advocated workplace regulation in the name of beneficence.

If you look, for instance at Hitler's 25 point program in the 1920s, the Nazi Party advocated workplace regulation similar to what American liberals advocate:

"14. We demand profit-sharing in large industries.

"15. We demand a generous increase in old-age pensions.

"16. We demand the creation and maintenance of a sound middle-class, the immediate communalization of large stores which will be rented cheaply to small tradespeople, and the strongest consideration must be given to ensure that small traders shall deliver the supplies needed by the State, the provinces and municipalities.

"21. The State has the duty to help raise the standard of national health by providing maternity welfare centers, by prohibiting juvenile labor, by increasing physical fitness through the introduction of compulsory games and gymnastics, and by the greatest possible encouragement of associations concerned with the physical education of the young."

Thus spake Hitler.

Rather than relying on government, the approach that made America successful was allowing individual initiative as much free rein as possible. No system is perfect. But in the 19th century, the average worker improved their standard of living tremendously even as 100s of thousands of Europeans, Italians, Irish, Jews, Poles, etc. flocked here. No other nation in history has seen such a large influx of immigration, yet the economy was able to create better jobs for these people BECAUSE OF FREE ENTERPRISE. The economy didn't start slowing down until government intervention began in the 1900s.


Phil Orenstein said...

I found the students comments very interesting although somewhat niave. As manager of a machine shop in a growing NY manufacturing company, I have to agree with Mitchell's points with respect to what I witness first hand in the dynamics of the workplace on a daily basis. To give an example, Mitchell advised me about 2 years ago on employment at will laws and I took action to fire 2 unproductive workers and one uncooperative worker. The production volume almost doubled with the cut in staff and morale improved tremendously. This is just a small example, but Mitchell is correct to point out the relevance of the failure of the French economy with a 9% unemployment rate, mostly brought about by bureaucratic do-gooders setting up intrusive employment at will laws and stiff regulations, which tie the hands of managers and owners alike, which ultimately hurts everyone more than allowing the labor market to remain unregulated. IMO this led to the unproductivity that caused the missed Airbus deadlines and the voter's chioce of Sarkozy to introduce market reforms in France. I hope my opinions from the "real world" help the discussion along.

Mitchell Langbert said...

Thanks for your support, Phil. Good dinner last Saturday!

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