Distortions in the Labour Market

Many of the most venerable and respected political parties of the world came on the stage as defenders of the rights of workers.

They drew the major part of their support from trade unions. It was a simple dichotomy. Workers were on one side. On the other side were the tight-fisted bosses of businesses drowning away honest workers’ hopes with poor pay. Centuries later, this game is going on with politicians siding with workers, especially so at the time of elections.

During the last electoral campaign in Mauritius, it was the same complaint being echoed across the political spectrum. Trade unions raised the issue of ‘minimum wages’ for workers to be legislated once and for all, given the miserly salaries and difficulties encountered to make the ends meet by those at the bottom of the ladder. They were given great hopes that this will be done. Since then, a budget has been presented. No reference in it to ‘minimum wages’ for workers. On the other hand, workers saw the maternity leave extended by two weeks per changes made in the labour law by the Finance Bill passed on last Wednesday. This is not exactly what the trade unions and political parties had been advocating.

It is not that politicians would not have wanted to give a guarantee to workers that their wages would not slip below a decent threshold. Facts are different. The labour market has proved to be not conducive to such guarantees being granted.

Studies conducted in developed countries have concluded that, despite some signs of economies of countries emerging out of the recession in the wake of the financial crisis of 2007-08, wages have stopped rising the last five years.

There are quite a few reasons for this situation. At the broader level, as the study by Thomas Piketty (Capital in the 21st Century) has demonstrated, there has taken place a secular increase in the share of incomes generated by economies to the factor of production called Capital. The share going to Capital has been even more pronounced in favour of Land owners. Consequently, the residual factor of production, notably Labour, has continuously been seeing its share of the national income shrinking with time. The last five years are only an extension of this secular trend.

Why? For one, productivity gains are not shared equitably among the factors of production- Land, Labour and Capital. For example, productivity has increased by 220% in America from 1960 to this day. The gains however have been disproportionately shared. Real wages increased by only 100%, the rest being appropriated by owners of land and capital (including owners of intellectual property rights). We should be able to come to the same conclusion for Mauritius should the University of Mauritius or another local research body probe into how productivity gains over the last 50 years have been shared over here.

The labour component is finding itself in a tight corner due to various reasons. Already, its share in the total income generated has been declining. Within this falling share, there are significant differences in the levels of income distribution. Recently, the former Governor of the Bank of Mauritius was drawing attention to the stark scale of disparity between the top earners and those at the lower level in the formal private sector. Even though the difference would not be that big in the public sector, public servants in Mauritius, especially those at the top, manage to use several devices, including membership of parastatal bodies, to widen the difference between their take-home pay and that of others who cannot obtain such appointments as committee members, directors, advisers, what have you! This is a generalizable phenomenon across other countries. In the US food industry, for example, CEOs earn 300 times the average pay per worker.

Workers have gradually become vulnerable over time. Companies no longer depend on them exclusively as they did in the past to carry out production. They’ve changed the labour-capital mix in production in such a manner that they can easily shift away to capital should labour look for an increase in pay. Technological advance has given them increased flexibility to do so.

Besides, labour laws have been crafted in such a manner as to enable companies to dispense with labour of the permanent type. Companies increasingly resort to temporary employment, based on flexible contracts (so-called mini-jobs). This ground was being prepared way back in the 1980s when the Voluntary Retirement Schemes were begun in the country. We “adapted” our labour laws in 2008 again to be able to “face international competition” as “there was an economic crisis out there” and we had to parry against it, isn’t it? In reality, those changes were intended to help companies dispose of labour more easily through what is called a “hire and fire” legal disposition.

Not surprisingly, temporary and transient employment has become the norm. This gives significant leverage to employers to keep workers’ pay as low as necessary. That’s why we are seeing so many expatriate workers employed in almost all areas where our workers don’t want to put up with work due to extended or “inconvenient” hours of work or, simply, too ‘low pay’. One just has to go to bakeries, supermarkets, filling stations, etc., to meet temporary foreign workers who have stepped in as the cost and convenience of hiring Mauritian workers or even their availability for work becomes too “onerous” in the eyes of the employer.

Add to all of this the globalization of the workforce. Many countries send their labour, having varying degrees of work skills, to other countries such as to the Middle East. The workers’ remittances back home have become important to the home economies. This kind of global worker movement maintains pressure on a lower threshold such as ‘minimum wages’. If prescribing a ‘minimum wage’ in different sectors of activity would lead to workers being thrown out of their current jobs, as it might well, not many governments would want to take a bet on it. They risk being thrown out themselves at the next elections.

Given all these internal and external pressures, all political parties can do is to stand up the bad guy (here the employer) to fight against. They are prepared to play the role of Don Quichotte the Knight Chivalrous fighting the fictitious “giants with long outstretched arms”, i.e., the windmills in the original story. Eventually, they do nothing of the sort for fear of losing the elections.

Nevertheless, there are tools in the hands of governments to mitigate the adverse impact on workers and their families of holding down the wage and pay scales to miserable levels. Governments are in a position par excellence to serve as redistributors of wealth and income in societies. They can tax and take away from those who have too much of what they need really and give it back to those who cannot be legislated into minimum wages due to “the operation of the forces of the market”.

They can do so without affecting the level of economic production of the country. Some of them prove to be bold enough to go in this direction. Others keep a watch on risks to their campaign financing if their usual corporate sponsors got too annoyed with them. To govern is to steer a middle-of-the-course path which does not bring about the enormous growing disparities we are seeing for quite some time now between workers’ pay and earnings by owners of capital.


* Published in print edition on 15 May  2015

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