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Prof. Dr Christoph Frei enlightens us in his critique to the current state of affairs. Is labour regulation strangulating work? Does it really protect employees? Is it an incentive not to create new jobs? These and other questions are put in context, as he calls society up for action. Employers, employees and the society at large should take responsibility over decisions regarding the future of work.

Regulation and the Strangulation of Work

Prof. Dr Christoph Frei

Years ago in Economics 101, I was taught that human beings are limited in the work that they can accomplish by their physical and mental capacities, their imperfect skills, and the increasing debilitation of advancing age. At the same time, human needs are boundless. Since there are not enough human and material resources on earth to satisfy every need, scarcity is inevitable.  For some it is experienced as poverty and the lack of tangible resources, for others as a state of pervasive dissatisfaction in the midst of material plenty. 'Economic' behaviour, in fact, may plausibly be portrayed as a natural reaction to scarcity. Without recourse to violence, we can alleviate scarcity and improve our condition mainly through labour and exchange. Division of labour allows us to focus on particular activities and unfold our abilities at the highest possible level. In this way, everyone gets an opportunity to better her condition.

According to neoclassical theory, people pursue their idea of betterment through individual choice, and they bear personal responsibility for the outcomes of their choice. Some satisfy their needs through productive activity, others by claiming goods and resources without making a corresponding effort - if society is organised as to allow for this choice. Attitudes to work vary, as do expectations about labour relations.

Ideal world, real world

In ideal never-never land, labour relations form in a free market. Through voluntary agreement, the employer and the employee seek the best possible arrangement for their respective sides. Access to labour markets, freedom of contract, and the mechanism of price formation secure the bargaining power of both sides. When and where in place, such mechanisms stimulate and reward mutually beneficial behaviour between the parties. Voluntary formats such as career counselling, employer ratings, and employee associations evolve to reduce the problem of information asymmetry. Both the employee and the employer can make erroneous or mutually harmful decisions. Both sides must learn from their mistakes.

In the real world, labour laws have been enacted to protect the employee from the employer, who is considered to have (and often does have) superior bargaining power. Would anybody argue that the British Factory Act of 1819 prohibiting child labour under nine years of age and limiting the working day to twelve hours was a bad idea? Throughout the 19th and into the 20th century, examples of vastly beneficial labour laws guaranteeing minimally acceptable working conditions abound.

Not surprisingly, specific traditions of labour market legislation have developed over time. Strict regulation à la française is plausibly considered an extension of the time-honoured Code Civil. This type of state-centred Code du Travail was taken up by many countries in Europe and passed along to ex-colonies around the world. On the other hand, Britain and its own ex-colonies including the United States inherited the English common law, where the judge and the jury were so important that an elaborate body of regulations was never really needed. Freedom of contract, not state intervention, thus became the norm—if we set the legal institution of slavery aside.

Empirical findings

Today, the extent of labour regulation varies considerably among countries. Almost everywhere, however, a limited number of general laws have been superseded by scores of specific regulations. These include the setting of minimum wages and overtime pay, paid parental leave, the establishment of minimum working conditions ranging from working hours and the modalities of worker participation through anti-discrimination down to 'employment protection' in the broadest sense of the term, with stipulations regarding health, safety, and termination of contracts. Labour regulation also requires a monitoring mechanism, be it informally via trade unions or through official labour inspection.

Economists and social scientists have contributed to a vast body of literature that seeks to understand and address the performance and efficiency of labour market regulations. Based on evidence from OECD economies and elsewhere, they tell us that regulation designed to improve working conditions and wages does work to some extent. Among its conspicuous consequences are improved working conditions for those who have work, a more egalitarian distribution of wages, and a reduction in low-skilled jobs. A more unpleasant consequence is the pervasive displacement of less skilled workers whereby the old and the young, the less educated, the inexperienced, and the long-term unemployed have difficulty in meeting the stipulations required by labour regulation. Further indirect economic costs include higher taxes and a bigger welfare system, both of which factors put a fiscal burden on existing jobs.

By and large, labour market regulation thus leads to fewer jobs, with employment available across a narrower range of ages. In highly regulated economies, more people are excluded from the labour market, and they remain unemployed for longer. Those who are employed gain at the expense of those who are not. Against the backdrop of appalling youth unemployment between the end of compulsory education and the mid-twenties on one side, and the low employment rates for those aged 55 to 64 on the other, the French have an apt expression for their situation: “une seule génération travaille à la fois”—one single generation works at a time.

By and large, labour market regulation thus leads to fewer jobs, with employment available across a narrower range of ages.

Shades of grey

Blaming unemployment on regulation alone would, of course, distort the picture. At the upper end of the age spectrum, the ejection of older workers from the regular work force is not only, but also a side-effect of technological change, which itself extends the life span and makes it more than ever imperative to increase income in the later stages of life. Many reasons account for the fact that barriers to desirable employment would be greatly reduced but certainly not gone even if all forms of governmental labour regulations were to vanish overnight. Given the choice, why hire a woman who might get pregnant and thus cost money even if there were no maternity leave to pay? Why hire someone whose health situation may be far inferior to that of a middle-class employee and thus lead to more illness-induced productivity loss? Why hire an immigrant whose vocabulary is still not broad enough even for everyday communication? The point is that even in comparatively unregulated labour markets, the young, the old, ethnic minorities, women, and the lower educated are at a distinct disadvantage.

All of which does not lower the cost of regulation. To analyse it through the lens of academic research is one thing. With a view to better understanding its full impact, we are well advised to leave the ivory tower. What we see is businesses producing reams of paperwork to demonstrate that they are in compliance with occupational safety and health guidelines, fair labour standards, immigration rules and a multitude other laws and regulations at national (or federal) and local level. As it stands, even the famously flexible U.S. labour market has quietly become much less so. As the Mercatus Center at George Mason University records, the sheer volume of federal regulations has more than tripled since 1970. When Richard Nixon was president, the federal register contained 35.4 million words. By 2016, that had expanded to 104.6 million words. 

Elsewhere, governments fare better. Countries that keep regulation in check show superior economic performance than countries that do the opposite. When it comes to indices such as real median salary, levels (and age distribution) of employment, youth unemployment in particular, a huge gap still separates France from Switzerland. In France, pervasive labour market regulation has always been part of an anti-market intellectual and legal inheritance rather than a response to dysfunctional markets. Even in Switzerland, however, there is no reason for complacency. There as elsewhere, what is happening in labour markets is just one manifestation of a larger trend that keeps increasing the complexity of what we call the rule of law—a secular trend that has brought forth a rather arcane system to the benefit of the politically connected who can afford to lobby in pursuit of their interests. For everyone else, the regulatory labyrinth increases costs, depresses economic vitality, and promotes cynicism.

Power, provident and mild

The underlying causes of this state of affairs have become the commonplace wisdom of political science and political economy. The study of public choice explains why 'choice' remains biased toward suboptimal outcomes. Given the incentive structures in the political game, better outcomes are unlikely. The median voter likes to believe that he will benefit from government intervention while the young, the unemployed and the less educated are too dispersed a constituency to make much difference. Selfless voters or suicidal politicians could, of course, produce better solutions. They seem to be a rather rare breed, however. Short of a wholesale change of hearts, only one solution suggests itself: change the rules, diminish the distributional elements in the political game. "Not an easy thing" when there are legal and socio-cultural path dependencies that would make the cost of fundamental change explode. "Mission impossible" given that the political game itself has become quintessentially distributional.

Never before in history have governments been more caring, more comprehensive, and more intrusive in their interventions than today. As public choice backed up by the threat of coercion is crowding out individual decision, our very ability to make decisions, to bear responsibility for the consequences, and to learn from our mistakes is diminishing. Over time, directives top down make the exercise of free agency less useful and less frequent. On the other hand, the modern welfare state appears as a tutelary power taking it upon itself alone to make us secure and to secure our gratifications, and to watch over our fate. Based on his own observation and intuition, here is how Alexis de Tocqueville depicts the contours of the regulatory state some 180 years ago.

Never before in history have governments been more caring, more comprehensive, and more intrusive in their interventions than today.

"That power is absolute, minute, regular, provident, and mild. It would be like the authority of a parent, if, like that authority, its object was to prepare men for manhood; but it seeks on the contrary to keep them in perpetual childhood: it is well content that the people should rejoice, provided they think of nothing but rejoicing. For their happiness such a government willingly labours, but it chooses to be the sole agent and the only arbiter of that happiness: it provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of property, and subdivides their inheritances – what remains, but to spare them all the care of thinking and all the trouble of living? (...) I have always thought that servitude of the regular, quiet, and gentle kind which I have just described, might be combined more easily than is commonly believed with some of the outward forms of freedom; and that it might even establish itself under the wing of the sovereignty of the people." (Democracy in America, Part II, Book Four)

our very ability to make decisions, to bear responsibility for the consequences, and to learn from our mistakes is diminishing

What would the French aristocrat have to say today, in the face of non-agricultural societies and largely globalized economies? Would he acknowledge that balancing short-term customer preferences with longer-term considerations might be a good idea, that scientific discovery of health and environmental impacts of farming and manufacturing might call for state intervention? Tocqueville's focus was, of course, elsewhere. 

That remarkable pretence of knowledge

If there is one aspect in the face of ever-increasing amounts of regulation that keeps amazing me, it is the seeming ease and indifference with which we—all of us as members of civil society—let it happen. Inadvertent surrender? Or are we simply keen believers in the "freedom from want" as propagated by Franklin D. Roosevelt in 1941? Is it possible that modern government can do away with Economics 101?

Spoiled as we have become on the receiving end of the nanny state, we seem to have lost the ability to accept, let alone appreciate scarcity as an inescapable feature of our lives. Since the everyday experience of the thing causes discomfort, we heartily welcome what we are told: “there is a remedy.” In public and political discourse, imperfections are thus being framed as the outcome of inappropriate human activity or dysfunctional institutions. A given distribution of goods is considered "unfair." Markets are seen to be at odds with moral values and principles such as "social justice." We need regulation.

Such is the ideology of the regulatory state, put in a nutshell: proper regulation can be done, imperfections dealt with, the requisite 'higher knowledge' (technē as in technocracy) is there. So long as scarcity is framed as something that can be overcome through adequate doses of social engineering, all public officials who represent people will focus on protecting their respective constituencies against related imperfections. The same goes for university professors, labour judges and regulators whose work is somehow incentivised through a narrative thus framed. All of them mean well.

It will be interesting (if possibly disquieting) to see how the ubiquitous application of digital technology will challenge, modify, and complement existing techniques of the regulatory state. The breath-taking speed at which the original version of a secure and low-cost expansion of personal communication and knowledge (developed, nota bene, in government-sponsored laboratories) has been compromised by unparalleled extremes of commercialization seems itself to call for regulation. While some monetize personal information garnered from users, others abuse digital media for fraudulent operations. To what extent shall we need the state and its power of coercion in regulating the digital space? And of equal import, quis custodiet custodes? Beyond being customers, we are citizens. When browsing the net, we turn into providers of data who can be profiled in turn. Feedback enables control. It does not take Tocqueville's genius to sense that the very modulations of social and political governance are about to change in truly fundamental ways. Shall we stand by with ease and indifference?