When Labor Legislation Steals Jobs : Too Many Mandated Benefits Make Employees Worse Off

While American firms have been busy battling foreign competitors, an old nemesis has been preparing for a behind the lines attack. The 100th Congress, a professed ally on the international front, has a slate of new regulatory initiatives in mind for U.S. firms that could make business leaders ask, “With friends like these, who needs enemies?”

The new forms of regulation may well be more pernicious than previous forms because they enjoy more public acceptance. After all, what hard-hearted Ebenezer Scrooge could oppose such obviously good things as parental leave, health insurance for employees and dependents, higher minimum wage, mandated plant-closing benefits and the like?

If these new or expanded labor requirements become law, Washington, in effect, will be transforming private personnel departments into welfare agencies. Government bureaucracies that now distribute benefits to individuals will be supplanted to a large extent by companies that will administer these benefits to their employees.

One supporting argument offered for this new wave of federal regulation gives a strange twist to the case for privatization: Making the firm a social agent of the state decentralizes social services and expands coverage, because government welfare offices cannot be as universal as firms. Further, if it is good to privatize some governmental operations to make them more efficient, then making the firm the delivery unit for social services should also improve the efficiency and quality of these programs.

Another economic argument offered is that the shift in responsibility would provide a positive feedback effect. By making firms social agencies, firm managers will have to consider these outside costs in their decision making.

Why is this spate of labor legislation coming to the fore? There are numerous answers to this question, but let me offer two that seem particularly salient.

The first reason is that budget restrictions on Congress are limiting its ability to authorize new government social spending. Imposing the costs on business is, therefore, an attractive alternative.

The second major factor is that a whole crop of myths concerning jobs has grown up in the last few years. One of the favorite myth is that the pace of economic change is accelerating, necessitating changes in outmoded labor policies. A related myth is that short-sighted business leaders are recklessly destroying manufacturing jobs in this country and these “good jobs” will disappear unless laws are passed to maintain them.

The most cogent argument against the new push by Congress to intrude on management prerogatives is that these proposals are not in the best interest of employees. Failing to realize that people are paid in bundles that are various combinations of wages and fringes, members of Congress have fixated on mandating one or a handful of benefits for all workers.

Legislation requiring employers to include specific benefits effectively means one of two things: Either employers will be forced to change other parts of the employment package that are not required--vacation time, rest periods, subsidized lunches--or labor costs will rise. Since workers are currently free to negotiate the mix of wage and non-wage benefits, it is logical to assume that mandating that mix will make employees worse off, not better off.

Ironically, new employees or unemployed workers would likely suffer the greatest loss. Absent a trade-off in the mix of benefits, labor costs will rise. Increasing the cost of labor will either force firms to reduce the use of labor or become less competitive. As mandated benefits increase costs, the number of jobs in the economy, particularly those in sectors hardest hit such as manufacturing, would decline.

The tempting aspect of regulation from a political perspective has always been that it shifts the costs to the private sector and hides them from the voter’s view. The benefits are obvious, while the costs are passed on to consumers and workers. Transforming private personnel departments into welfare agencies will hurt American competitiveness and reduce the welfare of employees. Increased federal intervention in labor markets should be resisted for one simple reason: In the final analysis, the new labor policies are anti-labor.