Labour pains: How government regulations are hurting employment and businesses

The laws, far from protecting labour, many times limit competition, discriminating against foreign companies and foreign workers. Often, it is not the laws themselves, but how they are enforced

Anyone who has ever been an employee is acutely aware of the asymmetry of power between the employed and the employer. The person who writes the paycheque can often withhold it either temporarily or permanently at any time. Except for certain highly-skilled workers, market forces are usually on the side of the boss. Few would argue that prevention of child labour, worker safety and a fair wage are not worthy goals of government regulation. Sadly, often the only thing that government regulations prevent is employment.

In the United States, local governments have the power to require licences for people practicing professions. This seems to make a certain amount of sense. It might be in the government's interest to prevent fake unlicensed doctors or dentists to harm citizens. Although, a required full disclosure of competency, or the lack thereof, might do the same thing. Still state governments have gone overboard in their definition of a profession. According to The Economist, the "list of jobs that require licences in some states already sounds like something from Monty Python-florists, handymen, wrestlers, tour guides, frozen-dessert sellers, second-hand booksellers and, of course, interior designers."

Obviously, the purpose of these licences has little to do with public safety and more to do with limiting competition. By raising the entry costs with licences that require expensive training or quotas, the workers can defend their turf. In Japan the number of law students who actually pass the bar exam is less than 2%. This limits the number of new lawyers to less than 3,000 a year.

Often these laws limit competition by limiting foreigners. In Saudi Arabia, Saudi nationals are favoured over foreigners. Unlike foreigners, Saudis can be sacked only with great difficulty. But, instead of creating jobs the law backfires, because it is unattractive for employers to hire its own citizens.

Sometimes it is not the labour laws themselves, but how they are enforced. Strikes in China are usually quite rare, because local governments dislike any type of social unrest. Recent strikes against Japanese firms were allowed to continue. They serve a double purpose of adding to workers wages and present a convenient target for grievances.

Labour costs in countries such as Cambodia, Vietnam and Laos remain a fraction of those in China, but foreign firms are still a target. Vietnam increased the minimum wage, but only for workers at foreign-owned companies. Taiwanese firms have been the target of labour unrest.

Lengthy procedures to terminate workers also have a perverse effect of creating a two-tier labour market. Since it is so difficult to fire people already employed, employers are discouraged from hiring new employees. This has created unemployment among young people of up to 40% in countries like Spain and Greece.

The result of these inflexible firing laws has often made it easier to hire temporary workers who are entitled to fewer benefits and can be easily terminated. In Spain they make up 30% of workers. Japan used to be the home of life-time employment. Now it matches Spain. Temporary and part-time workers have increased from one-fifth to one-third of the workforce.

In India the Industrial Disputes Act of 1947 also made it difficult to hire and fire workers, but it only applied to companies of a certain size. The perverse effect has been to make many Indian companies capital intensive in a country where labour is cheap and limited company size to avoid regulation. So unlike China, India cannot capitalise on what should have been a comparative advantage.

Brazil's labour laws were originally based on the labour code of Mussolini's Italy. Instead of a separate law that could be easily amended or changed, some are written into the country's constitution. Workers have their own labour courts, where a fired worker can get a far greater severance package than one who resigns, sometimes as much as 4% of the total amount the worker has ever earned.

Finally, inefficient labour regulations force more and more workers and employers into the grey market. On paper, Spain has an unemployment rate of over 20%, but this is dismissed as fiction. Millions of workers register as unemployed so that both they and their employers can avoid paying social security contributions. Grey economies in emerging markets top 50% of the economy. As a result, not only is tax evasion rife, but workers who need the most protection do not get it.

Reforming these laws with perverse incentives would often benefit both workers and the economy. But reform is never easy for the simple reason that there are huge economic investments and incentives for both labour and employers in maintaining the status quo. But crises have their uses. Sometimes change occurs when there are simply no other alternatives.



Nagesh KiniFCA

5 years ago

Having worked in a large listed company with a history of lockouts to heading Finance in Delhi at Garment exports units, I have witnessed grass root levels of Labour Laws and labour anagement incl. the methods at circumvention.
Gone are the days of George Fernades, Datta Samant who betrayed the workers. The need of the hour is a bunch of dedicated educated Union leaders who can sit across at the Board to negotiate fair deals and stand up to management bullying and not be bought over.

Flat opening indicated for Indian stocks: Monday Market Preview

High crude prices and inflationary pressures are expected keep investors jittery

The domestic market is likely to see a flat opening as most of its Asian peers were trading with modest gains on reports that France and Germany would chalk out a rescue plan for debt-mired Greece. However, European finance ministers who met on Sunday failed to announce the release of a new loan to save Greece from a debt default. Positive economic indicators during the week helped Wall Street break its six-week losing streak. On Friday the US markets closed mixed. The SGX Nifty was 14 points higher at 5,386.50 compared to its previous close of 5,372.50.

The 25-basis-point hike in key policy rates by the Reserve Bank of India (RBI), higher headline inflation for May and worries about a slowdown in the global economy along with the contagion effect of the Greek debt crisis, pulled down the Indian market by 2% last week.

The market, which was largely volatile, closed flat on Monday as the broader indices helped to limit the losses. The indices snapped their four-day losing streak, ending with modest gains on Tuesday, despite a sharp spike in headline inflation for May. Nervousness ahead of the RBI's policy review led to a steep fall on Wednesday.

On Thursday, the rate hike announced by the central bank together with signals of an economic slowdown, dragged the market further down on the last two trading days of the week. Overall, the Sensex tumbled 398 points, to end the week at 17,871, and the Nifty slipped 119 points to 5,366. There is a likelihood of a small gain on Monday. However, it may get capped at around 5,450, or at best around 5,500 on the Nifty.

US markets closed mixed on Friday supported by a slew of positive indicators during the week. A fall in initial jobless claims and an increase in housing starts and a less than estimated fall in retail sales lured investors back to cheaper stocks after the recent decline in the markets.

The Dow gained 42.84 points (0.36%) to settle at 12,004.36. The S&P 500 added 3.86 points (0.30%) to 1,271.50. On the other hand, the Nasdaq shed 7.22 points (0.28%) to 2,616.48.

 Markets in Asia, with the exception of the Shanghai Composite and the KLSE Composite, were trading higher on easing of Greece’s sovereign debt concerns with France and Germany agreeing on a new bailout to the debt-ridden Eurozone member. However, the failure of the European finance ministers to announce the amount of the loan kept investors in the export-dominant region on guard.

Meanwhile, Japanese exports fell 10.3% in May from a year earlier, higher than analysts’ forecast for an 8.4% annual decline, and followed a 12.4% drop in April. Imports rose 12.3% in the year to May, taking the nation’s trade deficit to 853.7 billion yen ($10.66 billion).

The Hang Seng surged 0.74%, the Jakarta Composite gained 0.50%, the Nikkei 225 rose 0.59%, the Straits Times climbed 0.80%, the Seoul Composite was 0.53% higher and the Taiwan Weighted gained 0.28%. On the other hand, the Shanghai Composite declined 0.30% and the KLSE Composite was 0.08% lower in early trade on Monday.

Oil prices fell on Friday, with US crude plunging to a four-month low under $93 per barrel on a dimmer economic outlook and the European debt crisis. US crude futures for July settled at $93.01 a barrel, down $1.94, or 2.04%, its lowest since the 18th February. Brent crude for August settled at $113.21 a barrel, falling 81 cents, or 0.71%, the lowest settlement since 24th May.

Back home, the government is likely to allow foreign individuals to invest in mutual funds in the next two weeks but with a cumulative cap of $10 billion. The detailed guidelines are being worked out jointly by the finance ministry, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).

The move is aimed at broad-basing the flow of foreign investment in the Indian stock market, so that dependence on foreign institutional investors (FIIs), is reduced.


Weekly Sensex, Nifty: Bulls desperate as market is precariously perched on trendline support!

The Bears hold the upper hand, unless and until the 18,265 to18,372 points range is crossed. As the intermediate term trend is down, the strategy should be to use rallies close to this area for exiting long positions

BSE Sensex close: 17,870

Market trend

SHORT term: Down; MEDIUM term: Down; LONG term: Up

The BSE Sensex fell 2.18% this week on slightly higher volumes. The sectoral indices which led the decline were BSE IT (-4.51%), Oil & Gas (-4.80%) and Teck (-3.14%) while the only sectoral index which gained was BSE Power (+0.26%). 

One can see from the weekly chart (above) that the Sensex is in an intermediate term decline, as it has made a lower top and lower bottom formation. This is also confirmed by the MACD histogram (in green colour marked by the arrow) which fell below the median line in the week ended 13th May 2011, when the Sensex was at 18,531. As long as this oscillator remains below the median level, the intermediate term trend remains down. (MACD is short for moving average convergence divergence.)

At this moment the Sensex has marginally closed below the trendline support (in black) drawn by connecting the lows of 15,960-17,295 points. The immediate support from the 100wema is pegged at 17,625 points and the trendline support (in pink) is at around 17,207 points. The previous significant low of 17,295 points also falls within these two points and should be watched very closely, as a breach would lead to increased pressure on the Bulls.

If one looks at the bullish options (which look distant at this moment) the Sensex has to first survive above the support line this week and bounce. The 20wema pegged at 18,621 points is the first major hurdle that it has to cross and the trendline resistance (in purple) pegged at 19,420 points is the next hurdle to watch out for.

The only hope for the Bulls at the moment is the market maintaining symmetry as seen in the period August 2009 to June 2010. In this scenario we would see a sideways move in the weeks ahead.

Here are some key levels to watch out for this week.

  • As long as the Sensex trades below 18,032 (pivot) the Bears hold the upper hand.
  • Support levels are pegged at 17,683 and 17,495.
  • If the Sensex crosses the 18,032 level in close, it could go up to 18,219 or 18,568.

The Bears hold the upper hand unless and until the 18,265-18,372 points range is crossed. As the intermediate term trend is down, the strategy should be to use the rallies (due to some short-term oscillators having just ventured into oversold territory) close to this area for exiting long positions.

(Vidur Pendharkar works as a consultant technical analyst and chief strategist,




5 years ago


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