Economic impact of labor laws
Introduction
Basic economic theory perceive labor laws as having an exogenous meddling with market relations and foresees majorly negative effects on productivity and employment in a country. Labor laws can also bring about endogenous interference as its application and production are influenced at the sector and national level. The employments polices and labor laws adopted by governments have impacts on economic prosperity and job growth which can indicated by level of employment and the share of labor on national income. There is strong relationship between labor laws and employment policies, the competitiveness of a country’s workforce and the economic wellbeing of the country. This paper aims at looking into the economic effect of the adoption of labor laws and employment policies in a country.
Literature review
The relationship between growth of productivity and labor protection has been shown to have an impact on the labor market in an economy. Empirical evidence shows that strict employment protection normally has a significant negative impact on the flow of labor market and through this it prevents productivity growth. Even if the workforce benefits through higher wages and improved careers after a re-allocation of larger labor market , longer periods of unemployment and/or small wages in job positions obtained after displacement affect the displaced workers (Martin & Scarpetta, 2012). If the unemployment periods are longer, they can bring about low worker productivity upon return to a working position while reduced wages leads to de-motivation. It would be better if employment protection reforms are accompanied by policies that offer safety net for individuals out of employment and services that would help them in resuming work (Martin & Scarpetta, 2012)). An increase in the quality of labor institutions and regulations of labor market leads to a negative effect on the extent of unemployment outcomes. A research that controlled various macro-economic and demographic variables such as regulations on hiring and firing and hiring costs indicated that the variables had the greatest effect on the outcomes of unemployment. The way to minimize the unemployment level would be raise the workforce flexibility (Bernal-Verdugo, Furceri & Guillaume, 2012).
Countries whose labor laws are more flexible are able to have more exports than others whose industries grapple with strict labor laws. This can explain the need to outsource intermediate goods production to labor markers that are more flexible in industries with high volatility (Bernal-Verdugo, Furceri & Guillaume, 2012). Hence, flexibility is associated in labor laws is associated with higher economic growth. In markets where regulations on job security are enforced, the regulations serve as a hindrance to the process of creative destruction. The rigidity of employment protection laws has negative impact on the trade balance of a country and therefore, the economic growth (Muller & Berger, 2013). On the other hand, if the labor law favors exports, they will allow for increased utilization of capacity and in turn improved allocation of resource in line with comparative advantage. Such labor laws would allow the country to exploits its economies of scale; lead to improved technologies while trying to respond to outside competition and this will allow for creation of jobs in countries whose labor is surplus. Therefore, an increase in rigidity of employment legislation and protection will affect negatively the economic prosperity of the country. The reduction of workforce efficiency or competitiveness can be related to this strictness of employment protection since it has negative effects on the trade balance of a country and hence, economic growth. This also relates to the country’s foreign direct investment inflow and the country’s GDP (Deakin & Sarkar, 2008). . The lack of competitiveness can also be related to high unemployment rates and unemployment duration with most people affected being young adults and females.
At times, employment policies adopted by governments have gone out of balance and hence, placing unbearable weight on business which stifles innovation and having a chilling impacts on economic growth and jobs. Currently federal regulations and laws in United Sates govern almost all workforce issues relating to employment relationship, working conditions, hours, wages, discrimination and collective bargaining (Muller & Berger, 2013). . Several states have also enacted their own statutes in addition to the federal standards which have led to a labor regulatory system that separate by overlapping. Other than overlapping, the policies leave an open door for more litigation. There is a considerable cost related to excessive regulation as those states with strictest regulatory laws places the heaviest burden on businesses. The states are wasting an opportunity to minimize the rate of unemployment and even generation of new businesses as startups. While this does not call for a total deregulation of the labor system , the strict labor policies and laws fails to attain the intended purpose , which is to provide employees welfare and employment opportunities for all. The main job or aim of the federal and state government should be to lift the economy by making it more competitive and hence, creating more jobs. However, employment policies and labor laws that hinder the capacity of employees and businesses to negotiate and come up with efficient contracts leads to higher labor cost, increase unemployment and reduce productivity which slows down the economic growth.
Regulations that puts limit on workers and employees’ flexibility to agree on employment terms have both positive and negative effects. To start with, the policies make it more expensive to higher workers which reduce the rate of hiring. Secondly, these policies reduce the employers’ ability and general economy to adopt an efficient response to structural and cyclical changes which in the long-term reduce the economic growth (Eisenach et. al 2011). Differences in international employment regulations have also be shown to have impacts on national economies’ relative rates of growth. In some states, the doctrine of employment contract “at will” have been eroded by juries and this has taken away the employers’ rights to fire or dismiss non-performing employees or incase of economic necessity (Eisenach et. al 2011). In European countries like Spain, previous research has hypothesized that the reason for high rates of unemployment after mid-1980s could be attributed to labor laws. The hypothesis is that, these laws prevented employers from dismissing workers but at the same time making the employers reluctant to hire new ones. A consensus of the previous literature holds that eroding the doctrine of employment at will in such countries led to the high rate of unemployment (Eisenach et. al 2011). Evidence also suggests that adoption of exceptions of common-law to this doctrine is responsible for low growth rate of employment opportunities and employment levels. The erosion of the doctrine has also contributed towards more hiring of contingent or temporary employees as employers try to avoid the high costs (Eisenach et. al 2011). In summary, there is enough evidence that regulations and laws which do away with the doctrine of employment-at –will results to considerable impact the kind and level of employment occurring in a given country.
In addition, labor laws do not only affect the unemployment, but also the share of labor on a country’s national income. Labor market is usually in a unique equilibrium before the policies and laws bring about intervention and this should be seen as interfering with the competitive processes, which in turn leads to distortion of market outcomes. Adoption of new labor regulations and laws can bring about short-time changes distribution and even employment, and the resulting effects are normally absorbed as employees and firms try to adjust to the new legal provisions (Deakin, Malmberg, & Sarkar, 2014). These effects would be the same as short-term shock. For instance, regulations that tightens the protection for working time can bring about short-term unemployment as companies adjust to the new legal environment by cutting down on labor. Over the medium –term to long-term, while employers are responding to more strict regulation through more investment in specified human-resource, the scenario may be reversed. The protective labor regulations and laws leads to reduced amount of percentage of national income being allocated to wages (Deakin et. al2014). This shows that labor laws have an effect on the share of national income in terms of allocation to profit or wages for workers.
Conclusion
Evaluation of the impact of labor laws on the economy can be done from the legal and economic points of view. The hypothesis adopted by both is that labor laws have an effect on behavior of firms and employees with the larger percentage of the impacts being negative to the employee and the economy. While such laws are enacted to uphold fairness and one’s right at the workplace, over regulation hurts the creation of jobs and economic prosperity.
References
Martin, J., & Scarpetta, S. (2012). Setting it right: Employment protection, labour reallocation, and productivity, De Economist. 160(1).89-116
Bernal-Verdugo, L., Furceri, D., & Guillaume, D. (2012). Labor market flexibility and
unemployment: New empirical evidence of static and dynamic effects. Comparative
Economic Studies, vol. 5, p.251-273.
Muller , L., Berger, P., (2013).The Impact of a Country’s Employment Protection Legislation on its Economic Prosperity. International Journal of Humanities and Social Science.Vol.3 (12).
Eisenach, J. A., Bala, D. S., Howells, D., Lapp, R. B., Olson, C. A., & Passantino, A. J. (2011). The Impact of State Employment Policies on Job Growth: A 50-State Review. US Chamber of Commerce. https://www. uschamber. com/sites/default/files/legacy/reports/201103WFI_State-Book. pdf (accessed March 16, 2016).
Deakin, S., Malmberg, J., & Sarkar, P. (2014). How do labour laws affect unemployment and the labour share of national income? The experience of six OECD countries, 1970–2010. International Labour Review, 153(1), 1-27.
Deakin, S., & Sarkar, P. (2008). Assessing the long‐run economic impact of labour law systems: a theoretical reappraisal and analysis of new time series data. Industrial Relations Journal, 39(6), 453-487.
