How can wrong ideas feel so right and right ideas so wrong?

Governments often introduce legislation because it feels so right, yet end up causing untold misery. Lord Milner wielded great power over SA’s citizens before and after the Anglo-Boer war. He said, “If we believe a thing to be bad, and if we have a right to prevent it, it is our duty to try to prevent it and to damn the consequences.” Some of his actions, based on wrong ideas, caused great harm to many people.

Unexpected results caused by actions intended to bring about planned outcomes occur so frequently that the term “law of unintended consequences” has been coined. Most often the “law of unintended consequences” applies to government actions that do not deliver promised outcomes, and even result in consequences that are the very opposite of their stated intentions.

Labour policy and legislation affect the lives of a large proportion of the population of any country and appear to attract a disproportionate share of wrong ideas that feel right. In the labour field people often “believe a thing to be bad” and are of the view that it is government’s “duty to try to prevent it and to damn the consequences”. Unfortunately the consequence often is, as in SA, mass unemployment.

Establishing a legislated minimum wage feels so right that most countries end up with such legislation. What are the consequences? People whose productivity level is lower than the statutory minimum wage become unemployable, not because employers are nasty, but because employees, incapable of producing enough to cover the cost of their wages and share of overheads, are a drain on the firm. If the employer continues to employ them, the company will go out of business. The hard fact is that while minimum wage laws might feel right they cause unemployment.

To have no statutory minimum wage will feel wrong to many because surely everyone is entitled to a living wage. But what happens to job seekers who cannot find anyone to employ them at the minimum wage? Should they starve, or should they rather have the right to negotiate to work for a lower wage? But this is not possible. The feel right law prevents employers, under the threat of severe penalties, from entering into such agreements. Does this treatment of the unemployed person who is prepared to work for a lower wage, any wage, just to earn some money, now feel right and fair? Or does the statutory minimum wage start to feel wrong?

So-called labour brokers have been much in the news in recent months. These enterprises supply what is known as a temporary employment service (TES) and currently provide work for an estimated 500,000 people. They match their client’s short-term labour demands with available skills. Some workers turn to the TES because they cannot find full-time employment with a single employer, or because they do not want full-time jobs and prefer to pick and choose their working times.

TES firms overcome one of the serious problems that face all firms, especially small ones, which is to deal with the plethora of regulatory requirements related to hiring employees, such as PAYE tax deductions, unemployment insurance, and the intricacies of dealing with the labour laws. And TES firms provide the workers they employ and hire out on a temporary basis with the security of receiving wages from them so that they do not have to concern themselves about the reliability of the firms to which they are temporarily contracted.

Based on reports of illegal practices by some unscrupulous individuals and firms, to some people the practice of labour broking feels wrong, and as a result, they want labour broking banned. Have they thought it through, and are they prepared to “damn the consequences”? Do they truly want to see a potential 500,000 people added to the numbers of the unemployed? Throwing people out of jobs, even if it is a lesser number than 500,000 surely cannot feel right, even to the most virulent critic of labour broking. The legitimate response to the illegal activities of a minority of unscrupulous firms and individuals is to take action against them using existing law which enforces contracts and protects against fraud, and not to stamp out an entire industry that performs a vital job-creation role in the economy. Surely it would feel right to see more people safely employed than an increase in unemployment.

Government’s responsibility is to create an environment that will increase employment opportunities, reduce unemployment, and reduce poverty in the country. Members of parliament surely cannot believe that it feels right to adopt legislation banning labour brokers and increasing, with certainty, the misery of unemployment that already exists and is being exacerbated by the recession. They must examine their feelings and be brave enough to work out the feel right consequences of relaxing minimum wage laws and encouraging the industry of labour brokers.

Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article / 29 September 2009