By Manuel Agosin

The labour reform being discussed in the Senate considers labour relationships as a zero-sum game. Employers demand more flexibility and workers want more security in employment and wages. What is at stake is the preservation of two public goods: the stability of workers’ incomes and labour flexibility. A creative solution is necessary to succeed –such as the solutions implemented by Japan, Germany or Denmark-, instead of the antagonist visions that dominate the discussion. Furthermore, the Chilean experience of the past 25 years tells us that growth is vital to reduce unemployment and to increase real wages.

The labour reform has caused great controversy. On the one hand, the Workers Union of Chile (CUT) pressures the approval of every aspect of the reform that it’s’ leaders consider vital. On the other hand, business unions are defensive, trying to moderate some elements of the reform and to eliminate others.

The most controverted proposals are the prohibition to replace workers during strikes, CUT’s demand to negotiate by activity and not by firms (which seems to have been dismissed), unions’ legal entity, the obligation to belong to the legal trade union in order to receive bargaining benefits, and others.
Instead of burying the country in a struggle between those who aim to protect workers and those who demand more labour flexibility, we should take some distance and analyse the reform using fundamental concepts and learning from the international experience. Several OECD countries we want to resemble are used to this discussion, after spending decades applying the sort of policies that the Chilean reform project wants to promote.

Undoubtedly, in the labour world, it looks as if there are two great public goods which contradict one another and that need to be balanced. These goods are: the protection of workers’ incomes and labour flexibility. This last good is essential for the economy’s progress and to improve employment and real wages in the long term.

On the one hand, one of the aspects that aims to be secured with the reform is the security of income for workers. No one could object that people, particularly vulnerable people, shall have some sort of certainty that they shall not be the victims of dismissals, unemployment and loss of vital income caused by the inevitable shifts of the market economies. Furthermore, we may agree on the fact that setting boundaries on the variations of work income is a public good that we must ensure.

On the other hand, with no labour flexibility, growth tends to decrease and unemployment rises, particularly among young people. The reason is quite clear. In dynamic economies, some industries emerge and others contract. If the economy is not capable of reassigning labour resources from declining sectors to growing sectors with larger wages, the economy’s global growth deteriorates and wages get stuck.

Moreover, when dismissing workers becomes troublesome or when companies must face frequent strikes and do not have the chance of replacing missing workers even with their own employees who are not taking part in the strike, employers shall try to hire the lowest number of permanent workers possible, using instead mechanized procedures or temporary workers. Unionized workers shall receive the benefits, leaving those who have just entered the workforce aside. The result: high unemployment rates, particularly among young people and women.

In addition, when there is not an adequate level of labour flexibility, the economy cannot adjust to the competitiveness changes of its’ different sectors. In modern and open economies, some sectors necessarily decline, while others have expansion opportunities. The same happens within every sector, where some companies lose competitiveness while others thrive. It is important to enable workers to move from less competitive companies and sectors to others with greater chances of growing and providing better salaries. Therefore, the other public good we must preserve is labour flexibility, as it ensures greater growth, lower unemployment rates and more social cohesion.

Due to the current situation in Chile, the costs of the public good that represents labour flexibility are paid not by society but by workers, who are in poor conditions to face those costs as their capacity of previous saving is low or even inexistent. When a company is in trouble or a sector losses competitiveness, workers become unemployed and unemployment insurances are rather insufficient. Moreover, the cost of providing greater income stability does not fall on society, but on employers, who must keep within their payroll people they do not need or must evict with high costs.

What we need is a solution that helps preserving these two public goods. In order to avoid sacrificing one or the other, the State must intervene. Those countries which have achieved combining income stability with labour flexibility have done so in a way that is consistent with their economic reality and their culture.

There are international experiences that may help us to get out of the trap we are stuck in. I am going to talk about the experiences of Japan, Germany and Denmark. In Japan, large companies implement wage flexibility by making workers participate in the company’s profits. Therefore, their wages are flexible. When the company is doing well, workers do well, but when the company faces financial difficulties, a part of the salary goes down automatically. It is rather difficult to implement this model in Chile as total salaries are low and there are few companies that are audited. However, it could be implemented in corporations voluntarily.

Germany executed labour market flexibility to lower the high unemployment rates from the 1990’s to the mid-2000. The new labour policies introduced under Chancellor Schröeder’s leadership present several dispositions that make labour markets more flexible while tending workers’ needs of having non-volatile incomes. Employees and employers reached an agreement where unions moderated their labour demands to enable the country to recover international competitiveness, to grow in higher rates, and to lower unemployment. In addition, unions agreed to allow workers to go to part-time contracts during economic recessions to avoid dismissals. The State made the commitment of paying a percentage of the difference there is between employees’ full-time and part-time wages. Finally the unemployment insurance was improved, but workers must show they are willing to be employed in order to receive it.

In Denmark, workers may be fired on short notice and without expensive costs for the employer. But unemployment insurances are very generous, though they last a short period of time in order to motivate unemployed people to go back to work. In addition, active policies are applied in the labour market in order to train workers in new activities and help them find a job in growing sectors.

We need a more creative solution tan the zero-sum game that is ruling. And for the sake of our economy and society, we must find it soon. Let’s considers the unemployment figures. In France and Italy, where labour relationships are difficult and which seem to be the model we are following, the unemployment rate is 10.6%. In Germany, the unemployment rate is 4.7%, in Denmark 6.2% and in Japan 4.1%.

It is also interesting to compare how the unemployment rate is different in those countries that looked for creative solutions than in others that have continued with excessive protection towards workers without considering labour flexibility. While Germany has experienced a notable decline of the unemployment rate since the reforms of its labour market, which were implemented from 2006 on, France and Italy have seen an increase of unemployment, with a 10% unemployment rate that brings tension into their societies. Both countries tended to prevent labour flexibility, preserving the stability of workers’ wages.

Finally, I would like to point out the importance of growth for employment evolution and real wages. Those economies that have managed to grow in high rates show low and decreasing unemployment, with continuous rises in their workers’ real wages. On the contrary, those economies that do not grow result on unemployment and stuck real wages.
In our country, growth has been the main factor to reduce unemployment. The years of high economic growth have always come together with low unemployment rates; and the years in which growth has been weaker, unemployment has reached unacceptable percentages. Moreover, economic growth is closely linked to the increase of real wages. And low growth with the standstill of real wages.

Should we not be following Germany, Japan or Denmark’s example instead of keeping on being involved in labour disputes from which almost all of us shall come out as losers? Should we not enable labour reforms that do not damage growth instead of insisting on a reform that will negatively affect investment and growth?

Source: Economía y Negocios

Manuel Agosin is the Dean of the Faculty of Economics and Business of the University of Chile