Tuesday, February 14, 2006

Labor Laws

This is Mike, Guest Posting here. More like homecoming, but I still consider myself a guest. I told the story below to David, who begged me to blog it. I am currently studying Anthropology and Buddhism in Thailand, which gives me an interesting chance to see a lot of economic questions in a slightly different setting. Depending on my reception I may blog some of those too.

A friend of mine from Germany and I had dinner the other night and discussed German labor laws. In Germany it is exceedingly difficult, or at least very costly to fire a person. A very solid foundation of evidence of incompetence and damage to the firm must be laid before even thinking about firing a person, because a lawsuit and a government intervention will speed right in to the rescue. The intent, as is the intent with so many economic policies, is to benefit the poor, oppressed working classes against the evil corporations. The actual effect I leave as an exercise to you. I would suggest as a starting point that the laws benefit the already employed at the expense of the desiring-to-be-employed and the bottom lines of the employers. However, some employers have found an ingenious (if illegal) workaround.

Say an employee is peforming at a level that ought to get him fired but in Germany would not, due to the hassle. A manager at this employee's firm will speak to his counterpart in a competing firm and ask them to hire the employee away, through a headhunter. The employee, excited about being hired away, takes the job at the competitor and begins work there. Meanwhile, the new firm gives him a slight raise, but the raise and the salary are actually paid by the original firm. Why?

Because the labor laws allow a grace period of about a month after hiring in which companies can still fire new employees freely without much difficulty. So after a few weeks feigning due diligence, the new employee is unceremoniously let go, unable to sue his old firm which he left voluntarily and unable to sue his new firm which is exempt from the ruleswas still in the grace period. Apparently entire industries will engage in this kind of trade back and forth, under the table, all to maintain some form of efficiency.

The market finds a way, albiet a little messy. But who loses? That's right, labor.


David said...

Excellent post Mike; glad to have you back. But I disagree with your conclusion because only some labor (the bad kind) loses thanks to the swap. The good (or even average) labor wins because the swapping decreases the costs for a firm to try their luck and hire more people.

Even the one month grace period isn't enough to discover a bad employee, especially when an employee knows that all they have to do is work hard for a month and then slack off when the grace period's over. With this swapping option, the company can now hire with more confidence, giving the quality worker a chance he otherwise might not have had.

Jacob said...

But doesn't this same mechanism allow for a firm to ditch any laborer for any reason?

If it does, that means that these firms now have a way of ditching any employee for any reason (political views, disability, buck teeth, etc) while simultaneously preventing any hope or chance of legitimate legal recourse.


ryan said...

Does labor lose out because jobs are harder to come by? Being jobless in Germany is a completely different experience than being jobless in the US. The system can be sustainable for a rather long time if someone else is picking up your defense bill and you don't really care about your economy ever, you know, growing.

David said...

I don't have any inherent problem with firing people for their race or teeth or whatever. Two ways to go about this.

1) The employer is a jerk; he doesn't like black people so he fires them. If they were bad employees, well no biggie; they should have been fired anyway. If they were good employees, that was a just a dumb move on the employer because good employees are hard to find. His loss, another employer's (and the employee's) gain.

2) The employer's a good guy but the customer's a jerk. They don't like getting served, for example, by a black guy. Not only is that also a potential dumb move on customer, but it's also the nature of the industry. It's not like if the guy worked at a different company they would be okay with it. Hell, sometimes it's the customer's justified. I wouldn't want to see Denzel Washington playing a Nazi; it just wouldn't make sense.

Ryan: I am amazed you said a system of nongrowth can be sustainable if someone else picks up the defense tab. There are certainly more things a society needs than simply "defense." Now it's true that for most of human history, growth has been at or near or far below zero so we can call it sustainable in that context. But the standards have risen (especially for developed countries); politically and culturally it's harder to get away with very low growth.

Chris said...

I think Schroeder's government was going to try and pursue this practice. But, I doubt that Merkel will try to, as she is trying to get the economy turned around. Who knows, she may even be able to loosen the labor markets somewhat; but this will be hard since they're in a coalition now with the Socialists.

Nonetheless, your point is well taken. But, I don't know enough about econ. to know how labor is affected.

Good to hear from you again. I wonder if David will get Ron or Tim back.

ryan said...

All right, but Germany has been choosing low growth, low employment and high welfare spending for quite some time now. Have they suddenly decided to stop liking it? Yes, there are grumblings about reform. However: (a) Note that all discussion of the need for reform is linked with their aging population -- if their population was in equilibrium, their political system might be too; (b) is it that they don't like the system of no growth per se (or even in comparison to others), or that they don't like that if Europe continues to have low growth relative to others, their current geopolitical position is unsustainable? If they could remain geopolitically significant without increasing economic growth, they would in a heartbeat; and (c) who says they want reform? Yeah, they talk about it. But I talk about how I should be ruler of the world. Do you see me putting much effort into building my robot armies? Do you see them making much of an effort to reforme their system? Merkel suggests even a little reform and she gets the smallest of pluralities while an unpopular social democrat almost ties by promising more of the same. Objectively, they appear to value their postmodern fantasy quite highly. But if I'm wrong, and they want so badly to have more next year than they did last year, why does most of the population vote the other way?

I think it was Churchill who said that in a democracy, the people get the government they want -- and they get it good and hard.

Anonymous said...

I have to disagree with some of the comments here. For those who don't know me, I'm David's older brother. I've had almost 9 years experience in the real world. There is one question no one has asked. How did the bad employee become an employee in the first place? In my experience it's rare a firing is solely the employee's fault. It is often a combination of the employee and employer, meaning both have failed to some degree.

At my last job, the manager was incompetent but stayed on due to internal politics. He managed six people. One was fired for vague reasons. The rest quit, including myself, and all of us had one reason in common, that manager. The skilled employees lost because they all felt forced out while the bad employee won because he got to stay on.

A good friend of mine is going back to school while working. Her employer said they would accomidate her and give her flex time, but this semester not only did they fire her because of her schedule conflicts, they told the unemployment office she quit. So not only is she out of work while paying for school, she has no unemployment insurance. So why would a company lie? Partially out of spite and mostly to protect themselves. Yes, evil corporations can be small companies too.

You see David, finding a job is hard. It's stressful in many ways, emotionally and financially. Even with an eventual return to employment, the damage can take a long time to repair. If someone looses their job for reasons unrelated to work, the short term can be devastating. People have lost their homes, marriages, even lives because of this.

Yes, employers do fire people for bad reasons and the employees must be protected. I think Germany has the right idea in demanding proof of ineptitude before letting someone go. Even a bad job is often better than no job at all. Last year I was told I was going to be laid off. Someone else quit out of protest so they changed their minds. I was bored and frustrated with how things were going there, but I still had a paycheck put in my account twice a month. I would have rather gone through that than the stresses of job hunting again.

It's one thing to talk about theory and policy and what is good for the whole and in the long run. But there's a human cost on an individual level that cannot be forgotten. If you don't have an inherant problem with firing someone due to race, wait until it happens to someone you know.

Mike said...

Hi David's Brother. Nice to meet (blog at) you.

The problem here is that these policies are well-intentioned. I have no doubt that the authors of these laws had precisely these difficulties in mind: the human suffering faced in unemployment, the potential for employers to fire for the stupidest of reasons, etc. Just because the law is good intentioned does not make it beneficial.

The unintended consequences here are pretty simple. If it is prohibitively difficult for companies to fire workers, it makes hiring them even riskier. Why take a chance on an employee if it turns out that when he isn't as good, you can't fire him? For that matter, why hire anyone at all who is new to the workforce? Guess which demographic is less likely to lose out here: youth, and the poor. More damning, why hire anyone in Germany? It would be far easier just to move the bulk of your operations to another country. This is not because the company itself is evil, but because it has little choice but to protect itself.

The end result is that turnover in the labor market is very small, and it is very hard to find a job. With job prospects grim, labor is likely at a disadvantage in wage negotiations. And we'd see very high unemployment and little job growth. Guess what Germany exhibits.

Sure, companies are evil. Big and small. People too. And I'd be willing to bet the companies that pull off this tactic are more likely to be small ones.

I'm in no way advocating this tactic. I'd much rather see hiring and firing done transparently. I think it can quite easily lead to the situation Jacob refers to (And David, I think this is why even good labor loses out--it has even less information and more risk of being canned for buck teeth--can you tell Jacob goes to school in the South?). If we must have a government involved to protect people, wouldn't it be easier just to go along with a form of unemployment insurance? I know plenty of posters here will cry out in pain at that, but I think they must all accept that on the margin it would be far worse than the laws protecting labor.

I'm not touching David's comment with a 10 foot pole. And Ryan, maybe people vote as they do because they don't realize the effect of their policies--and because such things are such emotionally charged issues. It's hard to stick it to the guy who gets canned and loses his wife, no matter how much you know it's a small price to pay for the good of everyone.

ryan said...

Am I really so far out in left field for suggesting that maybe these unintended consequences aren't so unintended? Okay, yeah, I probably am. But still -- when did it become the practice of economists to explain away behavior as irrational? What *wouldn't* irrationality explain?

Would a lot more unemployment insurance change a whole lot? If being unemployed isn't so bad, you're going to have to pay people a lot to get them to bother. You're going to have to pay for the unemployment insurance too, so costs go up even more. So you don't end up hiring a whole lot of people. Labor supply curve shifts left either way. But if you redistribute, it doesn't mean the poor are worse off, especially if you're measuring things in relative rather than absolute terms.

Anonymous said...

I'm Jason (David's brother). I keep forgetting to sign my name at the bottom. Bad habit I know. Anyway...

I have a problem with what you call "prohibitively difficult". I don't know what kind of proof you need in Germany, but I'm picturing nothing that can't be demonstrated quickly. Companies keep a lot of records on revelent things. Anyone being fired should have generated enough of a paper trail to make it easy to show why it happened.

"Why did you fire Mr.Smith?"
Acceptable responses:
"On a company trip to Nevada, he charged two hookers to the company credit card. Here is the credit card statement."
"Here are five written complaints of him verbally abusing other employees using profanity and racist language."
"I've highlighted the portion of his application where he says 'I have not been convicted of a felony'. And here is his prison record."
"Officer Jones has the arrest report when Mr.Smith punched me in the face."
"We found child pronography on his computer. Here are the web logs."
"As noted on these performance reviews, Mr.Smith has been disiplined several times about being late. His tardiness has not improved."
"A major client took their business elsewhere because of Mr.Smith's flippant attitude. Here is a copy of the e-mail they sent."

You see what I mean? The decision to fire someone is not made on a whim. Companies have a vested intrest to make sure the employee works out and to help problem employees do better. Firing should be a last resort. There should be enough in any ex-employee's file to justify their termination. If the employee was wronged, then he can seek legal recourse and the courts should be able to tell what is legitimate and what is frivilous.