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How Regulations Strangle Employment Growth: Part II

By Joel Anderson | 07/24/2012 | 5:44 AM

Last week, we discussed why government's actions ratcheting up labor regulations during a jobless recovery discourages job creation: The more government does to increase the cost of hiring and create liability for discharge, the more employers logically choose not to increase the labor force.

Employers will tell you this is a fact, but the question remains whether the data support their opinion. The answer is "yes." One example of this kind of research comes from Inter-American Development Bank into the situation that developed in Argentina from 1990 to 1996 and published in the U.S. in 2004.

The research was performed by Guillermo Mondino and Silvia Montoya for the Inter-American Development Bank, Latin American Research Network. Mr. Mondino later served as secretary of economic policy and in 2001 chief of the Cabinet of Economic Advisers to Argentina's Ministry of Economy, taught at Yale University and served as Chief Economist at the American Enterprise Institute. Mr. Montoya currently is an official in the Argentine government.

The researchers ran a series of data sets to attain an empirical analysis of the impact of increasing labor law regulations on what was at that time a jobless recovery. (Later, in the largest sovereign default in history, the country renounced its debt in 2001. The Argentinian economy has never recovered from this action.)

The economists studied Argentina and their results were published in a paper heavily referenced with data points, a bibliography and the methodology that was used in conducting the research. What they found shouldn't surprise anyone – as regulations drive up the cost and add to the financial risk that comes from adding employees, employers will seek out alternatives that will allow them to avoid hiring.

The researchers said that: "We have shown that Argentina's regulations do not quite do what they are intended to do. To compound the problem, our estimates indicate that when regulations become stricter, firms rationally alter their labor allocations. They substitute workers for hours. Indeed, we find that individually worked hours go up with an increased regulatory burden at the same time that the number of workers is reduced."

Firms rationally respond to the growing costs associated with increasing labor regulations by lowering their demand for labor, the researchers said. "Indeed, in the short run, but mostly in the long run, there is a strong negative effect of regulations on the level of labor demand."

The researchers said, "To conclude, an anecdote could help illustrate our findings. In May 1998, while the Ministry of Labor had sent to Congress proposed legislation that would further stiffen regulations, official statistics measured a very mild decrease in the unemployment rate relative to October 1997. Erman Gonzales, the Labor Minister, subsequently argued that unemployment was not going down because businessmen were not being 'socially responsible.' In spite of healthy GDP growth, they were not hiring more workers. He claimed they had, instead, increased the number of hours worked 'exploiting' workers. Politician to the bone, he blamed others for his own mistakes."

The previous sentence quoted should sound familiar to American employers. How often have we heard politicians scold businesses for not adding jobs and condemn them for doing things like paying down debt, increasing investment or adding to the corporate treasury stock. A quick scan of the talking points for the progressive and liberal press quickly shows vehement disapproval of the amount of retained earnings held by corporations. Again, they act the part of the scold and blamer, just like Mr. Gonzales in the 1990s.

It seems to me the better course of action would be for the government to simply step back from the unleashing the flood of new labor regulations that have added to employers costs and uncertainty, at least until we can return to healthy levels of employment. Government regulators do not create jobs: employers do, and this is just some of the published, peer-reviewed research that proves excessive regulation destroys jobs.

*Inter-American Development Bank, Latin American Research Network, Research Network Working Paper #R-391, The Effects of Labor Market Regulations on Employment Decisions by Firms: Empirical Evidence for Argentina, By Guillermo Mondino and Silvia Montoya http://athens.src.uchicago.edu/jenni/iadb/Ch7.pdf




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About Joel Anderson

Joel Anderson

Joel D. Anderson is president and CEO of the International Warehouse Logistics Association (IWLA). Based in Des Plaines, Ill., IWLA is the 120-year-old association of the warehouse-based third-party logistics industry, with 500 members in the U.S. and Canada. Before joining IWLA, Anderson spent 28 years at the California Trucking Association, the last 13 as executive vice president and CEO. An economist by training and profession, Anderson was also a past board member of Cascade Sierra Solutions. He is a frequent speaker before supply chain industry groups.


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