Saturday, November 15, 2008

More on labor issue

This posting leads me to re-read again what I wrote and I stumbled with this fact. First, unit wage cost became less sensitive after the crisis period to employment. In the pre-crisis period, One percent increase in nominal wage cost in the TCF industry was associated by 0.25 percent employment reduction. Yet in the post-crisis period, the one-percent change in wage cost was associated by 0.09 percent employment change.

The impact of nominal wage cost on employment
Statistik Industri

My argument is :“..After the crisis, firms are likely not to dismiss workers immediately in responding to rising wage cost, particularly older workers with permanent job status, because of, largely, high severance payments. However, at the same time, stringent dismissal regulations leads firms to restrain hiring new permanent workers, though wage cost declines..

Second: while at the same time, speed of adjustment in labor demand due to a shock is getting longer in the post-crisis period.

The Speed of Adjustment in Labor Demand (year)

“…Comparing between the pre and post crisis, we can say that the post-crisis labor market environment in the industry is much tighter that the pre-crisis environment. Two explanations can be offered here. First rising uncertainty in demand for output leads firms to keep the existing level of employment, despite a growing demand for output (e.g. footwear industry immediately after the crisis). Second, slow adjustment can be attributed to surging adjustment cost (i.e. firing cost). Therefore pointing high dismissal cost as an explanation behind this is quite justified…”

This situation applies only to permanent job in textile industry- part of formal employment. So given this, I cannot say that the impact of wage cost on formal employment will be the same as in the case of permanent workers. Yet this gives indication that even though firms' compliance rate to other labour regulations (non minimum wage) may be low, these have backwash effect for permanent job creation and, in turn, secure job.