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Trivia Tidbit Of The Day: Part 288 -- Job Security & Income.

The Paradox Of Job Security-

Generally, countries that mandate lengthy severance packages for laid off workers have lower incomes. The correlation is strong for GDP, standard of living, and a host of other economic indicators. And the causation makes absolute sense. If a company must pay a fired employee a year's worth of wages, the company is going to either not be able to hire an additional employee for a year-- or pay all employees less to compensate for the loss. Or just remain less productive. Or stop doing business, entirely.

With the exception of a handful of Eastern European countries that are transitioning-- and growing rapidly-- the trend line is remarkable:


The ironic part of all of this is that many American companies offer generous severance packages to employees, without any governmental intrusion on the matter. Usually these companies need to do so to attract or retain the best talent.

You could almost apply this trend line domestically, as well, by industry. The industries with heavy unionization, and mandated, guaranteed, easy-to-earn severance packages (like the auto, steel, and textile industries) have lower wages and higher unemployment. These companies also perform poorly within the American economy. Their GCP, Gross Company Product, would fall on the left side of a figure like the one above, if each American economic sector represented its own nation:

Protectionist measures rarely save jobs. A generation ago, American angst focused on foreign competition’s impact on manufacturing employment, particularly in automobiles, steel and textiles. We passed laws to restrict imports. Despite trade restraints and domestic-content laws, manufacturing jobs continued to decline even as overall employment rose. Most significant, some of the biggest job losses have come in autos, steel and textiles.

Saving existing jobs exacts a price. Countries that impose laws aimed at easing the burdens of job loss tend to have lower per capita incomes. World Bank data indicate that many countries impose huge burdens on employers who lay off workers—the equivalent of 165 weeks of pay in Brazil, 112 in Turkey, 90 in China, 79 in India. All are poor countries. High firing costs rob economies of their vitality by discouraging companies from hiring new employees in the first place. While generous severance is helpful to the displaced workers, it makes societies poorer by slowing job creation and dragging down labor productivity.

By contrast, countries with lower burdens on firing are usually richer. The United States, for example, mandates no severance at all, allowing companies to determine their own policies. Giving companies a freer hand in staffing decisions allows firms to pare payrolls quickly in response to changing market conditions, and it reduces the risk of hiring and forming new businesses. This labor market flexibility encourages efficiency, productivity and economic growth—all of which contribute to higher incomes.

It's paradoxical to a lot of folks, but not to economists. Rules that make it harder to fire employees drive up unemployment. If it's harder to fire, there's less reason to hire.

The Dallas Fed (.pdf).


Previous Trivia Tidbit: Canada's Crime Rate Is Higher Than America's.

Posted by Will Franklin · 6 March 2006 09:39 AM


That graphic is one of the best I have ever seen you do Will. Very clear, and having the sources right there really helps.

Had no idea Brazil was such an outlier.

Posted by: Ken McCracken at March 6, 2006 07:29 PM

The object is not to have to pay extensive severance because the employee, when displaced, is placed into a job market that is eager to hire the person and therefore the period of unemployment is very short. Instead of having an economy that has an overabundance of jobs for displaced workers, these countries would rather have employers paying employees to not work.

Why is America so cold hearted and evil? I just hate this place and our projected 5% GDP growth for 1Q2006 and our 4.7% unemployment rate. I would much rather be unemployed in France than employed in the US.

Posted by: Justin B at March 7, 2006 03:13 AM