Wednesday April 25, 2018 03:09 PM

The cost of protections

The cost of protections
Who does employment protection harm?Mahmud Hossain Opu

The people who suffer the most are those locked out in the informal sector

As we know very well, all sorts of foreigners think it’s very important that the wages and working conditions of people working in Bangladeshi factories are regulated.

Regulated so that they rise of course, as all those non-governmental organizations are shouting about over the garment trade factories. And it’s true that we’d all very much prefer that there not be another Rana Plaza incident, but the reality is that these sorts of regulations and minimum wages are between a near irrelevance and positively harmful.

For the vast majority of the Bangladeshi economy isn’t taking place in these regulated sectors. The influence of whatever minimum wage there is — for example and only as an example — is thus going to be minimal at best.

As this newspaper reported, 87% of the Bangladeshi workforce is in either farming or other varied forms of informal employment. What happens to the wages of that 13% is interesting, but not of great moment therefore.

Unfortunately this gets worse, for the impact of greater regulation and the imposition of higher-than-market-wages on that regulated and formal sector can — indeed will — make it more difficult for people to leave the informal economy and enter the formal one. In this sense, it’s actually better that regulation of terms, conditions, and wages be weak, not strong.

The cost of too high protections for formal workers is that too few workers gain any protections at all

No, not because it’s morally objectionable that people get a fair day’s pay nor that work is safe, but because too strict a set of standards means the vast majority of them are excluded from even the most basic and minimal protections.

Sadly, this is something that near no one in the rich countries understands, including most to all of those who sign petitions and drive the NGOs in their insistences. Which is why they keep insisting upon such damagingly expensive policies for those in the formal employment sector.

Again, this isn’t to say that people don’t deserve good wages and good working conditions. Instead, it’s just to insist that such things come with a cost. And in a poor — which Bangladesh still is, sorry — and improving — which Bangladesh most certainly is and for that, huzzah! — country, the people who suffer are those locked out in the informal sector.

The problem of minimum wage

South Africa is a good example of what can happen with this. It’s a significantly richer country than either India or Bangladesh. But there’s still that vast and similar, not as large but of a similar scale at least, section of the population locked out of that formal economy. Simply because the minimum wage is too high for people to be employed in that formal economy.

Note that “wage” here means all of the costs of employment, wages plus taxes upon employment, the standards that are on offer in the workplace, such benefits as holiday and maternity pay and so on. It is indeed generally agreed that South Africa’s problems in this respect is that the wages demanded in the formal economy are too high to absorb the available workforce. Thus, many are condemned to subsisting in the informal one, without any legal protections at all.

Both India and Bangladesh face a slightly different form of the same problem. The farming sector is still very large in terms of employment. Self-employment in basic farming is perhaps a better description.

But that informal and non-rural farm economy does indeed suffer from, well, that informality. There are no protections in this part of the economy at all, and one reason for that is that those in the formal economy are too high.

Yes, I know, this is obviously some running dog of the plutocrats insisting that the workers deserve nothing. But that’s exactly the opposite of the observation I’m making. I want, as do you, everyone to have the best deal possible, the fairest shake of that economic stick.

But if we make those standards too high then a very large number of people will be excluded from any benefit at all. The definition of “too high” here being that a very large number of people are so excluded. That is, the only proof we need that the hurdle that must be leapt into that formal economy is too high is that many employers simply cannot get over it.

The real costs

That 87%, perhaps minus that rural farming population if you like, are not in the formal economy is our very proof that the expenses we lay upon employment in that formal economy are too high.

The answer, then, is to reduce those expenses of being in the formal economy. In that manner, all will be able to be part of it. As we get richer of course we can tighten those standards, but we do need to do it that way around. Inclusion in the regulated sector first, only then tightening the limits of the regulation.

Fortunately this doesn’t mean that we’ve got to lessen the building standards — Rana Plaza really shouldn’t have happened. Nor does it mean that we’ve got to reduce wages in that formal sector. For those aren’t, in fact, the two major costs faced.

Rather, it’s the government that’s the real cost of the formal economy. The plethora of licences and permissions required to be able to do anything. The offices in Dhaka that must be visited, the little favours that must be promised for the right piece of paper with a stamp upon it. That’s the bit that is under our control and those are the costs that we can kill off at no great loss to anything other than the bureaucrats drawing a nice living from their paperwork.

We’d all like the position of the workers to be better, one good reason being that we’re all workers ourselves. But the way to make this happen is to reduce the costs of employing someone, starting a business perhaps, in the formal economy, so that we get to see everyone actually working in that formal economy.

For if we try to impose high standards now we’ll just be perpetuating the current situation, where the vast majority of the population is in the informal, entirely unregulated, economy, and thus gaining no protections whatsoever.

Absolutely everything has a cost to it as well as a benefit. The cost of too high protections for formal workers is that too few workers gain any protections at all.


Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.

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