Economic Policy Review ISSN 1313 - 0544

How Regulation Distorts Employment

Author: Zornitza Manolova / 09.04.2009
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Everywhere around the world the social policy and its role in the economy are perceived like a cure for all problems (unemployment, income, poverty etc.)  Under the conditions of a crisis, people insist even more for an adequate social policy, while the governments feel obliged to do something in order to respond to the crisis itself and the expectations of its people. Often, however, by doing something, the state not only does not help to overcome the difficulties, but intensifies and distorts them.

Since the beginning of the year many governments developed plans to cope with the unemployment, caused by the global economic crisis. They are mainly betting on: 1) direct assistance to the participants on the labor market (for example, the so called "crisis salaries" from the "Stanishev's plan"[1]), 2) programs for improved qualification and retraining (for example the program "New opportunity for employment" of the Ministry of Labor and Social Policy) and 3) creation of new jobs by initiating large structural projects (for example Obama's intentions to modernize the national infrastructure of the US).

In order to assess the effects of each one action it is necessary to review the benefits, which it would bring and the dangers and cost which it may cause. The following table shows the plusses and the minuses of the above mentioned policies and the alternative, which would cause a natural formation of new jobs, preservation of the existing ones and reduction of unemployment.




Giving out money directly

1. Provision of the so called "subsidized employment" for the workers

2. Allows the companies to keep its employees

3. Saves the companies in difficult position

4. Help to certain sectors

5. Fulfils a supportive social policy

1. The employment which have been created is not permanent and disappears with the end of the program

2. Does not allow the companies to optimize their activities

3. Encourages wrong management decisions

4. Distorts the market and the competition

5. Additional expense to build administrative capacity and execution

6. Creating dependence

7. Provokes lobbying activities

Simplify the process of doing business and the burden on the participants on the labor market by reducing regulations; reduction of social security payments; elimination of the requirement for a minimal capital, minimal salary, and working hours; simplifying the procedures for hiring and firing

Programs for Qualification and Retraining

1. Increases the knowledge and skills of the workers

2. Provides new opportunities for the workers for retaining

3. Helps the least qualified

4. Helps the workers - investment in the human 

5. Execution of creative social policy through investing in the human capital

1. This is a personal investment for everybody

2. It is not possible to decide centrally what skill in which area are required

3. Risk of teaching skills which are not required by the market

4. The assistance is only for certain individuals at the expense of others

5. The stimuli for personal investment and responsibility for your own development are reduced

6. A large state administration managing the projects is needed

Create an environment which allows the business to invest in human capital and reform of the education system (personal responsibility of the individuals; autonomy of the schools; decentralization of the educational institutions - financial freedom and possibility to choose; conditions for competition between the different educational institutions and teachers)

Infrastructural Projects

1. Modernization of the infrastructure and creation of new jobs

2. Creation of specific infrastructure

1. Irrational behavior in spending the money during a crisis

2. Risk of abuse and corruption

3. Ineffective management decisions

4. Lobbying interest impede the reforms

Apply impact assessment for every project and include the private sector and private capitals and investments by privatization and public-private partnerships

[1] The topic has been discussed in detail by Adriana Mladenova in issue 413 of the weekly bulletin of IME "Review of economic policy" - "Stimulating  employment during a crisis - how you should not do it".