A bitter capsule from Italian Premier Mario Monti on Job safety–Part II

For reading Part 1: A bitter capsule from Italian Premier Mario Monti on Job safety–Part I

The steep downward spiral of economy started in 2008 was really a hard hit for Europeans. Started with Greece, the economic woes slowly spread to the rest of EU - to Spain, to Portugal, to Italy, to Ireland etc. Not even UK and France were spared. When the political governments in Greece and Italy were not able to push the reforms they find themselves in the street. Existing governments were replaced by technocratic ones.

It’s often observed that, in the worst times ‘whatever possible to go wrong will go wrong. The case of labour laws and job safety are not different, jobs were hard to find. In Italy "Youth unemployment in December hit 31 percent, more than 10 percentage points higher than five years ago."

In many countries Labour laws were strict; you can’t downsize the company even though the prospects are bad. According to the report on a recent New York Times, in Italy, "Article 18 of the 1970 Workers Statute...forbids companies with more than 15 employees from firing people without just cause. The unions say that line cannot be crossed." Well, law ensured job safety but it also forced the business to rethink about investment. What will you do if the company is not doing well, as downsizing is not allowed? What we need to ensure is, companies should not be allowed to fire workers with impunity (for e.g. only to replace permanent workers with contractors), but they should be allowed to do so on rational grounds.

“The problem is actually getting a job, not being fired from one,” said Antonio De Napoli, 27, spokesman for the National Youth Council, a nonpartisan grouping of organizations, who argues that his generation has already accepted the flexibility imposed by current market laws. “What we want is greater support when we’re not working.”

I support austerity programs, but not the current one imposed by Brussels on the credit squeezed European Countries. Austerity is good; in this time of difficulties government should cut the expenditure, but not the capital expenditure. If government itself is cutting the capital investments then the private sector will not dare to invest at all. Everyone will try to increase the savings, which will invariable lead to the scarcity of money to invest. This situation will leads to mass unemployment and reduction in taxes, which will again leads to government income and more recessions. Even if cash strapped governments someway escaped from default, the austerity programs and scarcity of money for investing will increase the time for economic recovery.

The report[1] continues,

He further notes that “We are happy with these initiatives, but if banks don’t give young people credit, what good is opening a company with €1?” he said. “Flexibility is fine, but banks have to be open when we ask for a mortgage or access to credit. Otherwise, the young generation risks being slaughtered."

The unfortunate truth is many companies are focussed on making the input cheaper to do the same job instead of moving up in the value chain. It’s more alarming when the companies from developing world - even after staying in the industry for long time – are doing the same. Many of the companies in developing world are switching the permanent job with contractors and exploring the possibility of outsourcing to further low wage countries. Well this will make their balance sheet much better in the short term, but they are wasting an opportunity to move up in the value chain. Unfortunately many companies become a training ground for employees to achieve some skill and move to some other companies.

For job seekers this world is becoming more and harsher, in European countries, where the unemployment rates are alarmingly high, there is no guarantee that students will get jobs after coming out of Colleges. Even if you land a job there is no guarantee that it will be a permanent one. Surveys reveal that, people are ready to accept much lower salaries if there is a possibility to get a permanent job. The situation is really problematic. If the youth is not able to engage on something creative even after coming out of college and spending some years on job search, it will not take much time to see them on the streets.

Easiest way to solve the problem is massive public spending on infrastructure. This is easy for countries like China which is sitting on the top a huge forex reserve, but not for the cash strapped European governments, which are struggling to find currency for day-to-day operations. I have three suggestions for alleviate the problem.

1. Even though it is difficult it is important for countries to assign a certain portion of the bailout money or tax income for industry, especially export industry.
2. Government should kick start projects for national infrastructure development (mass employment) - focussed on the areas which will in the future contribute will nation's growth.
3. Earmark a certain percentage of money in priority research areas and product development.
4. Governments should give a line of credit to the potential entrepreneurs and ask the private banks to do so (loan should be guaranteed by the government otherwise no private banks will open a line of credit for Small and Medium scale industries).

If the people don’t have any hope or job, it will not be easy for governments to push the austerity program forward. Even if they went forward, without generating a source for foreign exchange through trade and other economic activities it will not be possible for the bailed out countries to live even after attaining financial stability.

Sajeev.

[1] NewYork Times