Monday, May 25, 2009

A little less flexibility

Australian EconoBlogger John Quiggin has been running an interesting series on refuted economic doctrines. The latest part of NeoLiberalism to end up in the dustbin of history? The superiority of flexible labour markets:

According to the latest Eurostat data*, the unemployment rate in the US was equal to that in the EU-15 in March, and is now likely to be higher. Writing in the NY Times, Floyd Norris refers to the conventional wisdom that flexibility inherent in the American system — it is easier to both hire and fire workers than in many European countries implies that unemployment should be lower (at any given point in the business cycle) in the US than in Europe.
But reality seems to disagree. And its not hard to work out why. In a flexible labour market, when times are tough, you can just sack people - so unemployment goes up. But where workers are protected by e.g. redundancy pay, sacking people can cost more money than would be saved, so unemployment is lower in a recession than in a flexible market.

Does this increase overall unemployment? Apparently not:

Generally speaking, employment protection laws lower the variance of employment and unemployment but have no clear effect on the average levels.
In other words, greater employment protections means more stability and security for workers. Who'd have thunk it?

How does this apply to New Zealand? Well, thanks to National's Employment Contracts Act - barely modified by Labour into the Employment Relations Act - we have one of the most flexible employment markets in the world. And so our unemployment is skyrocketing with the recession. These are people's lives we're talking about - work is what pays for food in your stomach and a roof over your head - but they're being consciously sacrificed by a policy of successive governments which puts bosses' profits first.

(This should also make it clear that National's policy of increasing flexibility through the "fire at will" bill - essentially creating an underclass of temporary employees with no legal protections - is exactly the wrong thing to do)

That's not good enough. It seems that what we actually need is a little less flexibility. One step towards that was announced yesterday, in the form of Darien Fenton's bill for statutory redundancy payments. I don't expect it to pass even if it is drawn - National will simply vote it down - but it signifies a shift in the right direction from Labour, and its an important peg in the ground for when they are next in government.