The Social Myths of Labour Policy

Last autumn LFMI completed an analytical study “Employment Regulations: Evaluation and Proposals.” Based on the analysis, LFMI presented to the Economic Ministry a project of amendments to labour legislation. The proposals are currently under consideration. Also, LFMI is submitting recommendations for a new Civil Code. The Free Market readers are already familiar with some of LFMI’s research findings and proposals. This article is based on LFMI’s analysis of social policy relating to employment regulation and a paper delivered to the seminar “Evaluation of the Quality, Structure and Development of Social Policy in Lithuania,” held on February 9, 1999.
The creation, or failure to create, favourable conditions for employment have a major influence on the social climate. Unemployment, low wages and meagre pensions are widely regarded as grave social problems. Social policy and employment regulation should thus be contemplated together.
Both social and employment policies are relatively new phenomena in human history. Social “policy”, or activities intended to help people in poverty, has existed from time immemorial, but in an altogether different form. Of course, it was not the “policy” as we know it today. It refered to activities carried out by churches, philanthropic organisations and individuals. Meanwhile, employment policy, just like labour law, sprang up as late as in the times of the industrial revolution. Until then, labour relationships, which are now regulated by labour law, had been left to self-regulation or private law. Employment was subject to the general principles of private law: equality of the parties, inviolability of property, freedom of contract, and binding agreements.
Yet, as workers developed into a powerful organised movement, the respect for property and freedom of contract began to wane. At the forefront came to be the goals of ensuring proper working conditions, eliminating conditions for “exploitation,” protecting the employees against the employer’s abuse and improving their state of being in other ways. Consequently, the wish to perfect the traditional principles of private law gave rise to labour law and employment policy as they exist in many countries today.
As opinion polls show, those who believe that labour safety requirements do secure safe jobs are not so many in number as those who argue that the state should control working conditions and labour safety. So people think that things are bad but they may be improved. Specialists appear to hold the same views. Are the expectations of better regulations justified?
The goals assigned to employment regulations seem to be acceptable. No doubt, it’s good when people have safe jobs, are not ill-treated and earn well. But good intentions, I’m afraid, are not sufficient to achieve these results.
Let us look at some of the premises on which employment regulations are based. First and foremost, employment regulations are designed to protect the rights of employees, as it is commonly believed that the employer is superior to his employees. This proposition was correct at the time when the state was the only employer. But as market relationships developed and demand for skilled labour grew, employees’ qualifications and abilities became increasingly important and the employer dependent on his employees. So petty employment regulations slanted towards “ill-treated employees” have created an inflexible system that hinders the employer and the employee alike.
Second, mandatory working hours, wages and other rules are set on the ground that free agreements are ostensibly disadvantageous to employees. This fallacy, however, denies the fundamental fact that people behave, and enter into agreements, as suits them best. The government is only a third party here and may establish, at best, that which it thinks is best for one or both parties. Needless to say, it is difficult to determine what other people need, and the state is no exception here. Let us take, for instance, regulations of working hours and vacation. These prevent people from working longer and earning more. Individual wishes and interests are left out. Naturally, these restrictions are frequently circumvened in practice. Even bureaucrats work overtime without getting adequately paid. One of the reasons is that the law prohibits advance agreements on overtime pay.
Third, to illustrate the “unregulated chaos,” the champions of employment regulations often picture a factory in the middle of the previous century with people working long, backbreaking hours for peanuts. But this is viewed from today’s standpoint, disregarding the fact that those formidable conditions allowed people to avoid much worse circumstances elsewhere. The belief that freedom of contract brought adverse conditions for working people is correct, but if not for freedom of contract, life would have been even worse.
The fourth problem revolves around the common belief that new regulations do not cause any damaging side effects. However, this is not always the case. Take the minimum wage, for example. What of an increase in the minimum wage if people lose jobs afterwards and, worst of all, no new jobs are created as a result?…
Employment regulations which are based on the said premises are misguided and unacceptable. Some argue that it is essential how labour-policy decisions are made. The Scandinavian model, which involves a tripartite co-operation of trade unions, employers and the state, has become increasingly popular of late. It is not even worth asking by what right some employers speak up for all employers and trade unions for all employees. The worst of it is, they often evade the question whether to regulate or not in the first place. What they do is determine straight away who will regulate and how. Democratic and authoritarian decisions do not differ much, if I may. Decisions regarding employment regulation are political, not voluntary, and cannot ensure the greatest possible benefit to the employer and employee.
Although labour regulations are often aimed at reducing social risks and poverty, restrictions placed on agreements and mandatory administrative rules bring only fragmentary, short-term benefits to individual persons. The social effects are invariably damaging in the long term.
These are general remarks about the social consequences of labour policy. The following presents the conclusions of LFMI’s analysis of labour policy as formulated in the study “Employment Regulations: Evaluation and Proposals.”
  1. Employment is regulated in an excessively minute detail. The goals of employment regulations are in many cases unattainable. Established norms are frequently dodged or obeyed as a mere formality. Labour law should define only fundamental principles of employment, without prescribing petty details.
  2. Freedom of contract is a key principle of employment. Its suppression has damaging effects on employees, employers and competitiveness.
  3. Labour law should not be used to regulate all forms of human labour. The object of labour law should be limited to employment in its narrow sense. The concept of labour contract should be narrowed to reflect the specific nature and essence of labopur relationships. The norms of labour law should not be used to regulate other relationships.
  4. Employment regulations should not be used to address the problems of tax collection, as this inhibits civil relationships and does not improve much tax collection.
  5. Overly stringent protection of employee interests has negative effects on the economy and in many cases turn against employees themselves. It is therefore important to define only minimum standards and leave more room for mutual agreements between parties involved.
  6. Labour law should not be used to address problems of selected segments of society, as this imposes excessive and economically unjustified costs on employers and harms the very objects of social security. Social problems should be addressed by social measures.
  7. Labour safety is over-regulated and the official attitude needs wholesale change. It is essential to prescribe specific requirements rather than procedures and to apply them only to dangerouos jobs More safety may be achieved by lifting bureaucracy and promoting internal controls.