Friday, September 10, 2010

you gotta be cruel to be kind

I am with Dani Rodrik more often than I'm against him, but this time I gotta disagree:

Spain, where unemployment has risen to 20% and domestic demand has yet to recover, has just approved a labor reform law that makes it easier for employers to dismiss workers.

I hope someone from the IMF or OECD -- the two institutions responsible for convincing the Spaniards that such a reform is an urgent priority -- will explain to me how reducing the cost of firing workers can lower unemployment in the midst of a decline in labor demand.

Now I'm not from the IMF or the OECD, but I'm pretty sure the theory is that by making it easier to fire people later, firms will be encouraged to hire more workers in the first place.

I wouldn't really call it an strong anti-unemployment policy (not gonna turn 20% unemployment into 10% say), but I do think it's an overall efficiency enhancing policy that could lower unemployment on the margin.

Nor do I think that the IMF / OECD run Spanish politics to the degree that Dani is implying here.


Anonymous said...

It reduces risk in the investment decision of hiring an employee. Lowered risk (all else constant) -> Increased expected return. Higher expected return -> Higher frequency of investment.

Anonymous said...

Dani's simply not looking 'in the right measure'

Angus said...

anon: EXACTLY!

FA said...

When it is easier to lay-off workers, you can hire new ones much frequently. Though the duration of employment is shorter, in a given period of time--say a year--you have a much higher rate of employment- and hence, a lower unemployment rate.