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Monday, 16 April 2007

ZIPPA on Unemployment

Zambia Institute of Public Policy Analysis continues to carry the torch for independent thinking, with its latest issue on Unemployment. [save the file before opening it].
ZIPPA continues to put out challenging and exciting material for readers. Well worth a read!

Neo Simutanyi's article on "casualisation" will undoubtedly stir much debate. He positively asserts :


In a labour surplus economy such as that of Zambia, arguments for high wages and guaranteed benefits and social security for all employees, goes against sound market principles. We need to avoid confusion and misrepresenting the employment problem. Pay and conditions are not the issue. People need employment and a regular income to meet their needs. Working conditions and job security depend on the overall performance of the economy and the ability of the firms to pay. When considering demands to prohibit casualisation in Zambia we should not ignore the need for labour market flexibility and employment creation.
I have to admit that I have not been completely persuaded by Neo's arguments. Yes, casualisation certainly has some advantages in terms of reducing employers labour costs, and I would go on to add a further point not mentioned, causalisation is useful in reducing the "search costs" of employees themselves as they change between permanent jobs. But none of that warrants the immediate conclusion that "pay and conditions are not the issue" and that these issues should be left to the market.

It seems to me that the analysis in Neo's article could benefit from clear separation or identification of two key questions. First, whether there's an economic rationale for Government to intervene in the "casualisation" market? Secondly, if the answer to the first question is yes, how does Government intervene to ensure there's limited distortion?

On the first question, the real issue is whether the casualisation market does suffer from market failures, that justify Government intervention or indeed whether Government intervention can lead to more superior solutions than we see at present. This requires careful analysis, but it is certainly not the case as the article implicitly asserts that the push for minimum wages for example necessarily leads to less employment. Infact the opposite is true under certain conditions.

We know from simple wage rate theory that where there's a dominant employer (monopsony) in the market, we are likely to observe wages below the equilibrium wage rate (the monopsony essentially equates the marginal revenue product of an additional worker to the marginal cost of hiring that additional worker, and then choses the appropriate wage). Under these conditions a minimum wage above the wage rate set by the dominant employer but below or equal to the equilibrium wage rate can indeed increase both the wages and level of employment. Economic theory suggests that under these circumstances Government intervention in the casualisation market can indeed lead to superior solutions .

This of course assumes that the casualisation market was operating under imperfect labour markets, but Neo does not present empirical evidence to conclude that the Zambian casualisation labour market operates under perfect or near perfect competition. This is an empirical question, but given that locational factors are of significance importance in labour market of developing countries like Zambia, it is fair to assume that the market is extremely imperfect, atleast at the broader level. So on the balance of probabilities, it is very possible that minimum wages in this sector could lead to increase in employment.

This leads us to the second issue of how Government could intervene in casualisation markets to ensure that it does not distort the market. Neo is right to caution against measures that reduce labour market flexibility and may in the end be counter productive. Not all potential solutions will lead to employment creation no matter how well intentioned. However, these dangers do not in themselves mean that Government has no role to play. On the contrary, we have seen that measures like minimum wage, could work well to improve job creation and possibly expand the level labour market leading to more economic growth. It is incumbent upon economists and others to think of creative of ways in which Government intervention can create a win-win solution. And crucially in that pursuit we must keep our eyes not just on economic efficiency, but also on equity as well.



7 comments:

  1. I didn't see the article you mentioned but that seems like reversed logic.

    When there is a labour surplus and people are desperate for a job, that's when they most need to be protected by fair labour laws.

    ReplyDelete
  2. error27,

    I have e-mailed it to you. I'll speak to Murray to see whether the link can be repaired.

    ReplyDelete
  3. casualisation certainly has some advantages in terms of reducing employers labour costs

    Yes, but in Zambia labour costs are not a problem.

    The article didn't go into many specifics about the actual situation. But I think that we could look at certain mines where the bosses are firing people for being active in unions. That should be illegal. Since the election some of the mines have resolved their labour disputes with the unions but at other mines they still need to raise the wages.

    ReplyDelete
  4. Good point!
    It does seem a bit counter- intuitive speaking of excess supply of labour and talking about reducing "labour costs" at the same time!!

    Your other point on the mines is valid too....really mines in my view are larger buyers of labour and in a world little employment, they flex their muscles. So surely a minimum wage of some sort would be beneficial to the employees, and as I think economic theory shows, it definitely raises employment as well!

    On legislation, you are absolute right. Neo's arguments seem to almost say that it should all be left to the market!

    I suspect we will hear his views soon! We are both members of ZIPPA!

    ReplyDelete
  5. I think economic theory shows, it definitely raises employment as well!

    I agree. Now those mine workers will have more money to spend. That boosts the economy and creates jobs.

    Mines basically need a fixed number of employees. You can raise or lower the pay but they'll still employ a fixed number of people.

    surely a minimum wage of some sort would be beneficial to the employees

    Mine workers make a lot more than minimum wage. The unions were accusing the mine owners of hiring contractors to do permanent jobs so they didn't have to pay benifits. Also I guess contractors probably aren't part of the union. Obviously that's a bad thing if it's true.

    To be honest, I don't know too much about Zambian labour laws.

    I doubt much could be improved by changing the labour laws either way. The problems with the economy are because of a lack of roads, education, capital, high price of oil, and high cost importing equipment etc.

    ReplyDelete
  6. error27,

    thanks for teaching me the tags! lol!

    "Mine workers make a lot more than minimum wage. The unions were accusing the mine owners of hiring contractors to do permanent jobs so they didn't have to pay benifits. Also I guess contractors probably aren't part of the union. Obviously that's a bad thing if it's true".

    I understood the PF/ NGOOCC argument in general to be both about benefits and also that these workers be it in the mines or eksewhere were payed less than prevailing wages.

    So you are right a minimum wage wouldn't really help casual mine workers, but could guarantee a "minimum" level even for them. As you rightly note, these workers are probably contracted elsewhere and therefore probably earning a wage substantially less than the average miners wage (for their level of expertise).

    ReplyDelete
  7. Unemployment in South Africa:

    http://www.washingtonpost.com/wp-dyn/content/article/2009/07/15/AR2009071503717.html?hpid=sec-world

    ReplyDelete

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