Saturday, 7 February 2009

Making Employees Pay

"In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences. " Henry Hazlitt
Any political argument which overlooks this simple objection is destined to fail. In a piece entitled, 'Redundant workers to get bigger payoffs,' the Independent unsuprisingly commits the error, and, again unsuprisingly, is completely devastated by Guy Herbert's refutation at Samizdata:
The Independent has what it thinks is good news for employees:
"The minimum amount of money that employers must pay staff they make redundant is set to be increased by the Government, The Independent has learnt. In another attempt to ease the pain of those worst affected by the recession, ministers have launched a review of the minimum payments to which people are entitled by law when they lose their job. With around 1,500 posts being axed each week, unemployment will soon pass the two million mark and could eventually rise to more than three million."
So, what is the predicatble effect of making redundancies more costly to employers? ...

Yes, Purnell minor, if the cash lost by making people redundant increases, they will be made redundant sooner, and firms will be more averse to taking the risk of hiring.

Those firms that do not make such precautionary sacrifices increase their risk of total failure, and none of their workers getting redundancy pay. So higher redundancy pay means more redundancies and more business failures, in an uncertain proportion.

What's worse, it is likely that such a change in the rules that is signalled in advance will mean large, well-informed and unsentimental corporations (which are typically more risk averse, and more capital intensive, anyway) reducing their headcounts to get under the wire. Even "a review" undertaken to give an impression of doing something, and as a sop to the trades unions, is likely to influence hiring and firing policies. And not in a good way.
I doubt even Henry Hazlitt could have disposed of the argument quite so quickly.

This type of headline policymaking represents a further slide into what Robert Higgs calls 'regime uncertainty', whereby investors can have no confidence that the rules of the game will be the same tomorrow as today, and understandably become reluctant to engage in long-term projects. In the current economic climate, making private investors and employers more risk-averse is precisely the opposite of what the government should be doing; this undermines the crucial role in economic growth of the entrepreneur, and creates self-fulfilling space for further government intervention. If only there were an employment policy that would allow employers and employees to find the right balance.

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