Sunday, 13 August 2017

Inequality and why we need legislated labour protections

The standard rhetoric of why we need labour protections (like health and safety standards, the Holidays Act, etc.) is that without the legal requirement to do so, employers would not otherwise offer these protections to employees. But that doesn't explain why employees would be willing to accept lower labour protections. The theory of compensating differentials suggests that workers will be willing to work in unattractive jobs (such as those with lower labour protections), in exchange for higher wages. If employees are fully informed about the lack of labour protections, then they may make a rational choice to take that job. So why do we need legislated labour protections?

I recently re-read Robert Frank's book Falling Behind: How Rising Inequality Harms the Middle Class, which I have blogged about before, and which offers some additional (and interesting) explanation of why labour protections are necessary.

Frank's argument can be easily summarised as four propositions, from the introduction to the book:

  1. People care about relative consumption more in some domains than in others (i.e. context matters);
  2. Concerns about relative consumption lead to "positional arms races", or expenditure arms races focused on positional goods;
  3. Positional arms races divert resources from non-positional goods, causing large welfare losses; and
  4. For middle-class families, the losses from positional arms races have been made worse by rising inequality.

Essentially, because we value our relative status, we over-spend on positional goods such as housing, and under-spend on non-positional goods (goods that don't confer status, or signal our status). One non-positional good is the labour protections (e.g. health and safety protections) that we receive during our work. We don't 'spend' our income on labour protections in the traditional sense, but we do accept lower wages in exchange for having those protections, which is in effect the same thing. In contrast, higher wages allow us to buy more positional goods (such as spending more on housing to get ourselves into a better neighbourhood). Therefore, we may be willing to trade off labour protections to receive higher wages, with which we can spend more on positional goods. Frank writes:
The positional account, by contrast, stresses that even in perfectly informed, competitive labor markets, risks that rational workers find collectively unattractive will often be attractive to them individually. A worker will accept a riskier job at higher pay because doing so will help her buy something important she wants, such as a house in a safer neighborhood with better schools.
Coming back to Frank's fourth proposition above, rising inequality leads the middle-class to spend more on housing (and other positional goods) in order to try not to 'fall behind'. So, when inequality rises (as it did in New Zealand in the 1980s, but not too much since - see here), we may need stronger labour protections. This is not because we are worried about any exploitative power of employers, but because the voluntary actions of workers in being willing to give up non-positional labour protections in exchange for income (that can be spent on positional goods such as housing), inadvertently makes those workers collectively worse off.

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