An interesting article from our resident contributor Murray Sanderson in the latest ZIPPA Quarter Journal on the important question of employment laws. I agree with much of the article but the treatment on minimum wage is slightly simplistic. New evidence from other developing countries does show that decentralised minimum wages can raise both employment and wages, in line with classical theory of monopsony labour markets. I know opinion on this is divided! See the exchanges on ZIPPA on Unemployment and What they pay Zambian security workers... :
Creating employment is an aim we Zambians constantly talk about. And yet, under the 'Employing workers' category in the World Bank's 'Doing Business' publication, Zambia rates as low as 135 out of 181. Can this disappointing showing be the result of worker-friendly policies?First, a general point from economics: when a thing is costly we buy less of it. High prices encourage suppliers, but they discourage buyers. The buyers of labour are employers. Set the price of labour higher than employers are willing to pay, and they will either not buy at all, or they will buy less.Who sets the price for labour? Isn't it the buyers and sellers themselves, the employers and employees? That is certainly true in a free market.But labour markets are often not free, or not wholly free, for political reasons. Workers outnumber bosses, so they have more votes. And politicians want votes, so they pass laws which enforce minimum wages. Such laws are popular. But there is a snag: legislation that boosts wages discourages job creation. This has happened in Zambia, but to point it out is unpopular, so no one talks about it, at least not in public. Let's look at two areas where apparently positive policies have had negative results.The Minimum Wages & Conditions of Service Act empowers the Minister of Labour & Social Services to issue statutory instruments which set minimum wages for all non-unionized workers. That is fine for people already in employment, but it creates a serious obstacle for the unemployed, especially for those without training or work experience. Most young unemployed Zambians would be glad to accept a job at a rate well below the official minimum wage. But the employer offering it would be breaking the law, and so would the person accepting it. So school leavers are denied the opportunity to get work experience, gain skills andestablish a track record. To put it bluntly: our minimum wages law considers only those already in work, it ignores the unemployed. This is an area where we need to think again.The other big area where labour legislation discourages employment is terminal benefits. Businesses without pension schemes are bound by law to pay 3 months pay per year of service as a gratuity to workers who retire after reaching 55 years of age and completing 10 or more years of service. For long-serving employees that can amount to a huge sum, far more than most businesses can afford to pay. The fear of incurring such situations is bound to discourage businesses from creating permanent employment. No less important, the provisions of this law are very unfair to employees, for the following reasons.The employee who moves to another employer before reaching retirement age loses the entitlement.It is also lost if he or she leaves for any other reason, such as to become an entrepreneur.The same occurs if the employee dies before reaching retirement age and completing 10 years of service.An employee who is dismissed for an offence forfeits the entitlement.All employees can lose out if the employer goes out of business.Another kind of terminal benefit is redundancy pay, which Zambia by statutory instrument sets at 2 months pay per year of service. This may not sound a lot, but for a company which has to reduce staff numbers because of difficulties it can be a serious problem. So it acts as an incentive to keep the workforce as small as possible.Other countries seem to recognize this danger, for few of them insist on redundancy payments in excess of one month's pay per year of service. Indeed, among the 181 countries covered by 'Doing Business', Zambia's benefit level is equaled or exceeded by only three countries, Ghana, Sierra Leone and Zimbabwe. Alas, mandatory generosity to workers who lose their jobs can be a major obstacle to job creation.These considerations suggest that 'worker-friendly' legislation can fail to achieve its purpose, and may seriously discourage employment creation. It is surely time for a careful review of our Minimum Wages and Conditions of Service Act. Even the best intended laws can misfire.