When Unemployment Laws Misfire written by Murray Sanderson

Creating employment is an aim we Zambians constantly talk about. Yet we also discourage it. Under the ‘Employing workers’ category in the World Bank’s’Doing Business’ publication, Zambia rates as low as 135 out of 181. Can this disappointing showing be the result of ‘worker-friendly’ policies?

First, a general point from economics: when a thing is costly we buy less of it. High prices encourage suppliers, but they discourage buyers. The buyers of labour are employers. Set the price of labour higher than employers are willing to pay, and they will either not buy at all, or they will buy less.

Who determines the price of labour? Isn’t it the buyers and sellers themselves, the employers and employees? That is true in a free market. But labour markets are often not free, or not wholly free, for political reasons. Workers outnumber bosses, so they have more votes. And politicians want votes, so they pass laws which enforce laws which enforce minimum wages.

Such laws are popular. But when employment laws misfire there is a snag: legislation that boosts wages discourages job creation. This has happened in Zambia, but to point it out is unpopular, so no one talks about it, at least not in public. Let’s look at two areas where apparently positive policies have negative results. The Minimum Wages & Conditions of Service Act empowers the Minister of Labour & Social Services to issue statutory instruments which set minimum wages for all non-unionized workers. That is fine for people already in employment, but it creates a serious obstacle for the unemployed, especially for those without training or work experience.

Most young unemployed Zambians would gladly accept a job at a rate well below the official minimum wage. But the employer who offers it is breaking the law, and so is the person who accepts it. Thus school leavers are denied the opportunity to get work experience, gain skills and establish a track record. To put it bluntly: our minimum wages law considers only those with jobs; it ignores the unemployed. This is an area where we need to think again.

The other big area where labour legislation discourages employment is terminal benefits. Businesses without pension schemes are bound by law to pay 3 months pay per year of service as a gratuity to workers who retire after reaching 50 years of age and completing 10 or more years of service. For long-serving employees that can amount to a huge sum, far more than most businesses can afford to pay. The fear of incurring such obligations is bound to discourage employment creation. No less important, this law is also very unfair to employees, for the following reasons.

1. Employees who change employers before reaching retirement age forfeit their accumulating entitlements.
2. They also lose out if they give up employment for any other reason, such as to become an entrepreneur. due to ill health or dies before reaching retirement age.
4. An employee who is dismissed for an offence forfeits the entitlement.
5. All employees lose out if the employer goes out of business.

Another kind of terminal benefit is redundancy pay, which Zambia by statutory instrument sets at 2 months pay per year of service. This may not sound a lot, but for a company which has to reduce staff numbers due to financial difficulties, it can be a huge problem. So it acts as an incentive to keep the work-force as small as possible.

Other countries seem to recognize this danger, for few of them insist on redundancy payments in excess of one month’s pay per year of service. Indeed, among the 181 countries covered by ‘Doing Business’, Zambia’s benefit level is equaled by only two other countries, Ghana and Zimbabwe. Alas, future legal obligations to workers who lose their jobs can present a major obstacle to job creation.

These considerations suggest that ‘worker-friendly’ legislation can fail to achieve its purpose, and may seriously discourage employment creation. Clearly, a careful review of our Minimum Wages and Conditions of Service Act is urgently needed. Even the best-intended laws can misfire.


Author: Murray Sanderson is Executive Secretary of ZIPPA, and this article is syndicated through www.africanliberty.org
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