Labor Law Losers

A new labor law went into effect at the start of the year, making it more difficult — and expensive –to fire employees. The law also specifies increased additional costs to employers, including minimum wages, overtime and benefits payments.

According to the Associated Press , Dongguan’s Taiwan Merchant Association reports that that the cost of doing business in China will rise by as much as 20 to 40 percent.

Calvin Chang, general manager of Shenzhen’s Jinghua China Investment Consulting, told Reuters that he expects labor costs to rise by 8 percent as a result of the law. He predicted that companies may move operations further inland in order to remain competitive.

There have been massive labor abuses in China. The brick-making slavery scandal was the worst of all those which have come to light this year, but there were also widespread reports of non-payment of wages, forced overtime, child labor, and other abuses.

But passing a law is one thing – implementing it is something else entirely. Many of Chinese laws, including guidelines about minimum wages, are frequently ignored. As the slavery scandal illustrates, local corruption and loose enforcement can make even the worst abuses possible.

There are two major problems with this law. One is the lack of detailed implementation processes. The other is selective enforcement.

Some companies feel that they can get away with flouting labor laws because of their geographic locations, importance to the local economies, or relationships with officials or enforcement authorities. And if a law is not well written, companies will try to find loopholes to get around the law.

Many companies, for example, spent the last months of 2007 forcing long-time employees to sign new contracts – or temporarily laying them off – in order to evade some of the requirements of the new law.

Finally, regulators may have overlooked one of the most basic laws of all – the law of unintended consequences.

If a law specifies special protections with employees who have stayed with an employer for at least ten years, then that creates incentives for employers to file marginal employees just before that magic number is hit.

In effect, the law will hurt those very employees that it was designed to protect.

Finally, some companies may leave China altogether – and the loss of jobs will be the worst blow to labor.

One of the best advantages that China had, in the battle for economic growth, has been that the government has been mostly immune to popular political pressures.

There are times when a government must step in and protect the rights of its citizens, and create an even playing field for all businesses.

But when a government leans too heavily towards protecting the rights of workers – as some European countries have done – the result is economic stagnation. Companies become reluctant to hire staff if they know it’s going to be difficult to fire them later. Constrains on working conditions and overtime hours can be over-protective – hindering innovation and competitiveness.

Passing a new labor law is a high-profile act that will help appease a nation of laborers toiling under unjust conditions. It is a more popular alternative than making small, incremental steps towards better enforcement of existing laws.

Unfortunately, the companies most likely to comply fully with the new law are foreign-owned export-oriented manufacturing firms. They are the first to come under the scrutiny of both local regulators and foreign activities. But these are companies that often offer the best jobs, and the best working conditions, and help build China’s export base.

These companies are also the most price sensitive – they came to China because of low labor costs.

Where will they go next?

The new law is creating an opening for other emerging countries to step forward. It is also creating more opportunities for China’s second- and third-tier cities to compete for this business.