The Disadvantages of Protective Labor Laws

Hamiltonian economics should, like all theories, be judged by its explanatory power.  We have begun to introduce our economics to the reader in Part I and Part II.  To prove their worth we tackle this old paradox in our terms:

Why are unemployment rates lower in Western economies with the easiest hire and fire laws?

Employees are resources.  Like other resources how they are put to work in business operations is determined by the Hamiltonian business cycle.

A review of Hamiltonian cycles:

All business cycles start with demand.

Cyclical booms are driven by booming demand, usually in a particular sector that is specialized to meet whatever type of demand is in vogue.

Demand in a sector spurs on what we call sector momentum.  As sector momentum builds, more and more resources are allocated to business operations designed to satisfy this demand.

Among these resources is labor.

Cyclical busts occur when booming demand falls below projections.  Businesses in previously booming sectors are left with over-allocated resources.  Reallocation of these resources occurs to factor in new market signals about demand.  During bust phases, labor that had been invested in satisfying demand during the boom is usually laid off.

In the West, laws that restrict how free businesses are to cut staff are ultimately self-defeating because they interfere with how well businesses can align labor resources with operations that meet demand during both boom and bust phases.

During upswings in customer demand, employers in nations such as France are deterred from hiring staff because they will not be able to easily release them (i.e., reallocate labor resources) during the inevitable downswing.

Nations that broadly support at-will employment have a relative competitive advantage. In these economies employers have more flexibility to adjust their employment levels to track changes in the business environment than nations with strict labor laws.

The greater flexibility offered by Capitalistic labor laws is advantageous because the changes in value signaled by the customer and environment are inherently unpredictable and constantly changing.  Resources, like employees, must change when value changes.  If labor resources, or any other resource, cannot easily be reallocated (or released), business performance is consistently performs at sub-optimal rates during both the bust and the boom phases because businesses cannot react to their environmental conditions.

Paradoxically, flexible labor laws result in lower unemployment levels because businesses working under those conditions have more efficient processes thanks to being able to more efficiently allocate labor resources as decision makers see are warranted by customer demand.


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