Street Power

The recent fiasco in France holds many lessons for democracies everywhere.

France has this strange combination of a thriving corporate industry and high unemployment especially amongst youth. The culprits here are France’s rigid labour laws which make it almost impossible to dismiss or layoff employees. Companies therefore prefer not to hire. If they have to, they use temporary workers. Since older employees can’t be fired easily, unemployment hits the youth. Much of the unemployment is among the children of immigrants which ultimately was the cause of rioting in France a few months ago. People with no jobs are more likely to riot – they have time on their hands and nothing to lose.

The government in France, with the best of intentions, decided to fix some of these problems to regenerate employment amongst youth. But they could not suddenly change labour laws across the working population. If layoffs were permitted across the board, sure, growing companies would start hiring young people, but there would also be a lot of older workers laid off and out of jobs. So the government decided to make it easier to fire only young workers in the first two years after they join.

Big mistake. Within days, massive student and youth protests were organized across the country. Colleges shut down because all the students were in the streets protesting against what they were calling a law unfairly targeting young people! The government first said it was willing to negotiate the time period – make it 18 months instead of 2 years. In the end, Jacques Chirac just withdrew the bill, in effect dashing the Presidential hopes of his trusted luitenant Dominique de Villepin who was the author of the bill. So were all students against the new bill? No. Last week they were interviewing a law student from the Sorbonne on BBC. The student was being asked about the law and the protests. She was against the protests and for the law. She didn’t like the fact that the colleges had been shut for the past 4 weeks and who knows what would happen to her final exams. But more importantly, she thought that the new bill would generate employment for the youth! She also said that none of the economics and law students of her university were in the protest marches.

I think the new bill would have worked. Not that the French government didn’t deserve the shellacking it got. They have nobody to blame but themselves for making France into an insular, inflexible place to do business. But really, this bill didn’t have a chance. Why? For two reasons:

1. The rationale for the new law is not easy to explain. It is not obvious that making it easier to fire young workers will result in higher employment among the same workers. I can imagine myself trying to explain that to a 3rd year medieval history student. Even if I knew French, I don’t think I could. On the other hand, the opposition can easily spin it the other way portraying it as an evil law designed to protect older workers or even designed to keep immigrant youth from keeping good jobs. Here I don’t just mean the Opposition in Parliament. Every change has opposition to it simply because someone is going to get hurt by the change.

2. The opposition to the law had Street Power. The people who were in favour of the new law like the Sorbonne law student and her friends, did not.

Cut to India. Labour flexibility, for decades, has been the one reform that no politician wants to touch. It is hard to believe that if you are the owner or manager of a company, your company can make losses, go bust and lose its entire net worth, but you can’t restructure your workforce. Capital treads softly where labour is inflexible. There was a time when there was talk of an Exit Policy for sick companies. A very unfortunate choice of name, if you ask me. The opposition (trade unions) quickly positioned the Exit in Exit Policy to be the exit of employees. ‘Hire and fire’ was another colorful phrase they used. The government had to bury the whole thing.

But its now resurfacing. You hear snatches of statements made by the PM and FM about the need for labour flexibility. Although they’ve picked a better name this time, I don’t like the government’s odds of passing any substantive legislation on this matter. Why? because of the same reasons that the French government failed.

How do you explain the rationale of labour flexibility to Mr. Godbole who is a teller in a bank? Mr. Godbole, we plan to make it easier to fire people such as yourself because this will encourage capital investment which will generate more jobs. I can just see Mr. Godbole’s eyes glazing over. Before he gets angry. Even Mr. Godbole can understand that making it easier to fire him is not good for his pension. Self interest is a great motivator. When it comes down to Godbole’s job security vs. more employment in the country, Godbole knows which side of his toast is buttered. And finally, Godbole is part of a union. He has Street Power. His union can call a strike, do a dharna and if it comes down to it, burn a few buses. The stakes are very high. And a burning bus is an arresting sight on TV.

The challenge of sound economic policy making is that often doing the right thing benefits a silent majority, but hurts a vocal minority. In some cases the vocal minority can make their voice heard. In others they can take their campaign funding elsewhere. You need money to run elections. You need votes to win them.

I do think that one of the most important reforms that the Indian economy can benefit from is bringing labour flexibility. This is the best time to do it when economic growth is strong. But I won’t be holding my breath waiting for it. Not while the govenment depends upon the support of CPI(M).

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4 Responses to Street Power

  1. My $ 0.02 says:

    Liked the silent majority and vocal minority comment. Applies to Indian labor market too, where the smaller organised labor force (as compared to unorganised labor) is able to have its way.

    Seems paradoxical as silent majority acconts for more votes than vocal minority.

    I guess another reason of failure of broad reforms is their proposal when there is no “tipping point” / major crisis. Most reforms happened when there have been huge economic crises: India in 1991, various European countries in late 70’s and 80’s (Britain, Netherlands, Ireland and Finland).

    People are not ready to change as too many of them still believe that status quo is better than transition. Unless there is a major crisis, little will happen.

    Look forward to hear your thoughts on how can one successfully transform before hitting a major crisis.

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  2. Sachin says:

    In India labor strikes and Dharnas are the terms of past now with the booming economy no union has time to waste in all such activates.
    More over top talents from large government firms are joining private companies for better opportunities and future.
    Some of the top companies in India like Maruti, SAIL, ONGC are not facing such problems more often in the current time because of money is being distributed by these companies in form of stock options, VRS etc.
    I could only see DHARNA and Strikes in Calcutta where CPI (M) is in power. Other wise rest of the India is making money, no time for Strike…)

    Reforms are always better to bring changes in life. But for private companies there are no labor laws, as they always have hire and fire (by other means like on the basis of performance) options open when they starts losing profits.
    Thanks to the booming economy more than 60% white color jobs are created by private sector and they don’t have Unions yet. Do you think if the labor laws are not changed then new sectors like IT will also have unions in the next 10-20 years?

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  3. Would appreciate if you could write something more in your “about” page.

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  4. karthik shankar says:

    Thought provoking. On an aside, I am worried that the government’s inteference in labor deployment by the private sector does not reach the point where there are job reservations in pvt sector. No need to panic overly on reservations in educational institutions (IITs and IIMs) as long as enough good quality reasonably priced pvt schools are available.Markets know best, will know to distinguish between a good candidate from a pvt school and a bad candidate from an IIT anyway. It is just that entrance exam as an effective determinant of candidate quality will move downwards from educational institution to pvt sector company. Unless the Govt brings in reservation quotas at pvt sector level in which case we are doomed!

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