Labour Market Flexibility: Soft and Hard Constraints 

By V. Bhardwaj

In the context of the debate going on the issue of the Tripartite National Forum, the chief editor of l’express gratified us with a beautiful piece titled “Réformiste” on the reform of the labour market and the issue of flexibility.

It is claimed that the new labour laws adopted in 2009 have added flexibility to the labour market and have helped to improve the business climate and our ranking in the World Bank’s Doing Business Index. This is further supported by the arguments that «…les règlements régissant les licenciements nuisent à la croissance et la création d’emplois. Face à une législation contraignante, les entrepreneurs jouent la prudence et refusent de prendre des risques. S’ils n’ont pas la garantie de pouvoir « hire and fire » selon la situation de leurs entreprises, ils hésitent à embaucher quand les affaires vont bien. »

Without being adherents to the status quo, we do not fully subscribe to this general neo-liberal statement that can be extended to mean that the necessary and sufficient precondition for an optimal creation of jobs in the Mauritian economy is a flexible labour market. I think that it is too early to start claiming, without much of evidence, about the relative inefficiency of our welfare state labour market institutions and the superiority of the hire and fire employment laws with a logic that lacks sufficient basis. The removal of the soft constraints — the policy and regulatory environment of the labour market — for a more flexible labour market policy is not, on its own, the solution to our unemployment problems. The “flexibility” argument is the new conventional wisdom but it remains controversial with many economists who want to explore some of the assumptions behind the case for flexibility and clear the ground for more sophisticated discussions about the roots of strong labour market performance rather than generalized statements.

For far too long the proponents of a crude model of flexibility have had the best of the argument – even though an accumulating body of research suggests that rather different policy packages can produce equally good results. The relative success of the Nordic countries, the Netherlands and Austria in keeping unemployment low is inexplicable when viewed through a standard neo-liberal lens. All these countries have higher taxes than the UK and the USA, larger states, more extensive welfare systems, strong trade unions, moderately tough employment laws and extensive coverage of collective bargaining. It is important to understand these rather simple and straightforward facts. The “European” story is not simply a tale of high unemployment in France and Germany. Nor is it a story of widespread deregulation leading to better employment performance. For example, in our case, prior to 2009, despite the relatively rigid labour legislation, the active labour market programmes for displaced workers from the sugar and textile sectors, SME development and incentives to boost placement of labour force entrants were critical in boosting employment creation.

For more evidence a summary indicator like the location of the “Beveridge Curve” may help. [The Beveridge Curve is the (negatively sloped) relation between the vacancy rate (the number of unfilled jobs expressed as a proportion of the labour force) and the unemployment rate (the number of unemployed job-seekers expressed as a proportion of the labour force).] Labour-market rigidities (including skill mismatches) are precisely what allow vacancies and unemployment to coexist, and the more rigidities there are, the further the Beveridge Curve diverges from the limiting, unachievable case of perfect flexibility. Studies carried out by some of our local researchers have failed so far to show any marked degree of rigidity in our national market, that is by how far the Beveridge Curve is from the limiting case.

A recent International Labour Organization study has argued that reducing employers’ responsibility to provide job security inevitably ends up imposing new tasks on the State, which must provide stronger and wider social safety nets to take care of the unemployed workers. True labour flexibility must be based on worker versatility: the workers must possess a variety of skills, so that they are qualified to change jobs with the changing economy. Building those skills requires time, and creating the worker versatility that can provide true labour flexibility must be a continual process. Has the National Empowerment Foundation and the “24/7” HRDC been able to assume this huge responsibility? NO.

There has been no spending on the retraining of workers in the declining industries such that they acquire the required skills to become employable in new sectors. The Empowerment Programme has not delivered in addressing skills shortages and labour market mismatches in the low end of the market; it is just a paravent for the private sector, ensuring that their labour search costs are minimized and that their short-term labour needs are subsided by government, especially in the ICT market. We need a more comprehensive programme of human capital formation that transcends short-termism and is supplemented by tackling the hard constraints, that is by:
a) appropriate reforms in the education sector to tackle the bottlenecks in primary and secondary education, vocational training and career and the upgrading of skills in Mathematics and Sciences;
b) ensuring the creation of linkages between the education and training systems and the responsiveness of training to the changing demand of the market and the needs of the economy;
c) promoting the acquisition of higher skills for the upper end of the labour market, for new technologies and new emerging sectors, and
d) enforcing a culture of training and lifelong learning at individual, organisational and national levels for enhancing employability and increasing productivity, and providing the necessary skill base and human resource thrust for successful transformation of Mauritius into a Knowledge Economy.

* Published in print edition on 12 November 2010