Wang Yijiang: Don't Interfere with the Labor Market
From Observer, page 41
Translated by Ren Jie
Original article: [Chinese]

Labor economist Wang Yijiang has been awfully busy these past few months. Aside from tending invitations to lectures and programs related to the new Labor Law, he has frequently provided consulting services.

A few days ago, a call from the manager of a Shenzhen clothing factory left a deep impression on him. In light of the Labor Law’s stipulation that employers must compensate workers for overtime work, the factory manager set a new rule barring workers from overtime. The workers were unable to make production quotas and had their incomes adjusted lower, which led them to strike. Ironically, much of the law is actually slanted towards workers, with new rules that tighten open-ended work contracts and strengthen the power of labor unions etc.

An ovesupply of labor in the market has pushed wages down, and with this trend a new labor law seemed reasonable. But should it be the foundation for legislation? Or is it more important to protect  economic development and keep employment high? Is it actually effective to raise the status of laborers and defend them through legislation? These questions have all drawn fierce debate.

Wang compares some successes and failures in countries’ use of labor laws, and then points out some of the universal experiences among them. He says that not every legislative intervention in the labor markets worked as planned. Long-term unemployment plagues the economy and employee benefits bottom out in these countries, such as in Germany and India, even though the original intention of the law was to defend and help workers. Wang believes this is the most important lesson.

We don’t know how the labor law could be implemented until the judical explanations and details come out. Wang hopes the explanations should be slack and comply with the market economy principle more.

EO: Basesd on international experience, what basic principle should labor legislation follow?

Wang: Almost all countries have labor legislation and have accumulated abundant experiences. Like the rules, some of the laws and experiences drawn from them are universal. There are two principles which decide the failure or the success. One is to make clear the responsibilities of the government and the businesses. The second is that the government should be clear what its own responsibilities are.

Fairness and efficiency are two problems facing society. The government should deal with fairness and businesses should focus on efficiency. The government’s job is to protect the health and security of workers, and defend the signing and implementing of labor contracts.

But the government should not meddle with the actual contents of labor contracts-- such as wages, benefits and working hours. The employers and the employees should  decide these matters by themselves.

EO: So, in regulating labor, the government should actually not do that much.

Wang: The fundamental jobs of the government are very few. As long as the health of workers is not bein harmed, the government should not intervene. For example, if someone would like to work 60 hours per week and can manage it without any health problems, this is completely acceptable. So there is no need for the government to limit the working hours within 40 hours a week. However, if the work hours extend to 75 hours and test the boundaries of a person’s tolerance, the government should intervene.

The idea is that government should not replace the businesses’ roles to make decisions on how to employ and whom to employ.

EO: if the government makes businesses be responsible for fairness, what would the result be?

Wang: businesses’ key issue is productivity. Inefficient businesses will reduce benefits or close their doors entirely, the latter of which would only lead to higher unemployment. On the other hand, highly efficient businesses will provide more jobs and better benefits. And businesses pay taxes to the government, without which the government cannot make income adjustments and maintain equality in society.

China learned much during the times of the planned economy. Lifelong employment, low wages, and high benefits killed workers’ learning initiative. During working hours they would rest, but after work, they were hardworking towards their own personal side jobs.

EO: what countries learned lessons from it?

Wang: Germany and India. Germany issued a law called co-determination which demanded the businesses’ decisions, arrangements and work conditions should be decided and agreed both by the employees and the employers. Under this law, the businesses could not fire any workers unless it was agreed to by the latter. Generally speaking, the workers could not be fired after they were 40 years old. Eventually, Germany’s labor market lacked of competitive strength, hurting the economy.

The Industrial Disputes Act (IDA) of India, passed in 1947, set the form of mediation between employers and employees. The law also states that when a business wants to fire more than 100 employees, it needs government approval. Businesses in India found it difficult to fire workers after the law came into effect.

EO: How do businesses react when the government tries to protect benefits with legislation? How is the economy affected?

Wang: There are a few kinds of reactions to this. First, businesses may not fire workers because it’s too difficult. Countries with these kinds of laws—Germany, Italy, France, India and some parts of Canada—bear higher unemployment rates, around nine and ten percent. This does not include workers leaving these countries and those not registered, so the true number may be twice the unemployment rate. However, the countries without these kinds of laws have rates of four or five percent.

The second reaction of businesses is they will choose to move their operations, in effect a capital outflow. The countries without such laws, like the USA, Ireland and British, are always capital importing countries. On the flip side, Germany and Japan are capital exporting countries, both of which have experienced stagnating economies. But the economy of USA, Ireland and British have flourished.

EO: Are there some examples where the government protects laborers through legislation but still keeps the economy healthy?

Wang: The places with healthy economic development always follow two principles. One is that the responsibilities of businesses and government are clear. The second is that the government never interferes in businesses’ affairs directly, but instead works to improve efficiency in the labor market. For example, the US passed a law to protect the rights of labor unions in the 1930s. But the core of the law demands that employees and  employers solve disputes though negotiation. That said, the government never gets involved in the process nor attempts to steer the results of the negotiation. As a result, for the past 70 years the US economy has been strong, and unemployment is among the lowest in the world.

Wang Yijiang earned a PhD in Economics from Harvard University and has taught at the Carlson School of Management at Minnesota University and the Tsinghua University School of Economics and Management.