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Laboring Through Unintended Consequences

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One of the most impressive people I know is Manuel Ayau [2] – or “Muso” as he’s known to his friends. A Guatemalan, Muso was influenced as a young man by Leonard Read [3], founder of the Foundation for Economic Education [4]. Over the years, Muso has become one of the leaders of the worldwide movement for freedom. Among his many achievements, no doubt his single finest is the founding and leadership of Universidad Francisco Marroquin [5].

Muso shared with me an essay he just wrote on labor regulations in Guatemala. Here’s a point that I find especially interesting.

As in Europe, labor law market rigidity has had a detrimental effect on employment, salaries, wages, and the whole economy, except that in Latin America it has been, in my view, devastating. For a taster: severance pay requires the employer pay a worker upon “unjust” dismissal one month’s wages for every year he worked in the firm, according to the last rate of pay. All dismissals are taken to be unjust because they are not the worker’s fault. You can imagine the perverse incentives this puts into play, especially in a country where most –but not the most conspicuous- employers are also poor.

The workers end up getting paid less than they’re worth. First, because a raise would instantly increase the contingent liability disproportionately by the amount raised, multiplied by the number of years worked. Second, the worker looses his bargaining power as time goes by as his cost of voluntarily leaving the job (for a better one) becomes more significant in proportional to the years worked. The workers, in effect, become captive workers because the cost of leaving a job is considerable; there is no tendency to seek employment where their contribution is optimized, with the resulting lower productivity for the whole country (and higher prices = lower real wages). Often, workers make trouble to make it worth while for the employer to fire them. You can imagine what this does to the work environment.

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