All Commentary
Wednesday, August 1, 1984

Two Myths of Employment Protection

Ronald M. Ayers is Assistant Professor of Economics in the College of Business, The University of Texas at San Antonio.

In recent years organized labor and its supporters in government have campaigned for legal restrictions upon business mobility. This campaign mirrors the frequent support that has been given to trade protection by union leaders for many years. Indeed, the common objective of measures of both types is job conservation. The simple argument seems appealing that a society merely needs to legally restrict imports, or legally or institutionally restrict or discourage plants from relocating, in order to preserve employment. Eliminating the human misery caused by unemployment is a worthy goal. However, elementary economic logic is at odds with the notion that restrictions of these types provide employment protection in any meaningful sense. Furthermore, the benefits of a free economy—free resource mobility and free trade—that are forgone upon the adoption of restrictions may be substantial.

“Capital flight” is often considered to be one of the greatest evils attending a free economy. When a firm closes down or relocates, and it is a major employer in a community, the unemployment created, the human suffering and many other negative effects on the community are highly visible and immediate. The fears that communities will slowly decline and eventually die, that chronic pockets of unemployment will dot the economic landscape, and that American workers are being abandoned in favor of cheaper, unfairly priced foreign labor, become manifest today in proposals for restrictions on plant relocations, or on imports from foreign countries, or both.

While it is widely known that the major methods employed to reduce foreign imports are tariffs and quotas, the issue of restricting business mobility has arisen comparatively recently, and the methods of restriction are less well-known. Therefore, before reviewing the fallacies involved in attempting to conserve jobs by these means, let us consider the specifics of how capital movement is impaired. Three categories of restrictions exist: 1) restrictions found in collective bargaining agreements, 2) restrictions legislated at the state and federal level, and 3) restrictions rendered by decisions of the courts.

Restrictions on plant relocations written into labor contracts vary in their impact. Perhaps the strongest provisions are those which permit unions to participate in plant shutdown decisions. When carried to the fullest extent, the consent of the union or of a joint union-manage-ment committee may be required before a plant may be closed or relocated.

A simpler, less obtrusive provision is the requirement of advance notice. This is one of the more common provisions, as is the requirement that severance pay be granted the displaced workforce. Sometimes, unions seek to have current employees transferred to new facilities, or seek to establish jurisdiction over new or relocated plants.

Less commonly seen provisions provide for geographic limits on relocation, and for employment services and retraining. In the most strongly worded case, no plant movement is allowed without the approval of the union.

Plant closing bills requiring employer notice have been introduced in at least nine states, and have passed in two, Maine and Wisconsin. At the Federal level, bills requiring notice and special aid for workers have been introduced regularly since 1978, but have not as yet been approved.

Adverse Effects that Stem from Employment Protection

Prevailing judicial law dealing with these matters was established by the 1981 U. S. Supreme Court decision in the First National Maintenance Corp. vs. National Labor Relations Board case. In summary, the Court ruled that the employer had a duty to bargain in good faith over the effects of its decision to close an operation, but no duty to bargain over that decision.

That restrictions on business mobility may arise from three sources tends to complicate matters for firms contemplating a move of some sort. Should the rhetoric favoring restrictions gather more steam, it is possible that in the future every firm will find its location decisions under scrutiny, and every firm will then have to develop a policy regarding such matters, just as firms now must deal with tariffs and quotas.

Can foreign import or plant relocation restrictions really save jobs? At what cost? The one basic economic effect that both types of measures promote is a shift of resources from more efficient to less efficient uses. This central tenet implies several adverse effects that make very clear the fallacy of employment protection. These are:

1. Any benefit to employment is likely to be temporary. Tariffs and quotas designed to save jobs tend to cause other nations to institute protective measures of their own, leaving everyone worse off than before. A similar ripple effect among communities could well occur if plant closing laws were to become commonplace. Furthermore, such laws tend to create profitable opportunities for new firms, so that in the long-run the more immobile firms, at a competitive disadvantage to newcomers, may decline and ultimately fail.

2. Both kinds of restrictions tend to cause higher prices. Consumers are hurt, while workers in inefficient firms temporarily benefit. In the case of tariffs and quotas, the long-run result will be a movement out of more efficient industries and into the less efficient, but protected, ones. Plant closing laws have a similar long-run effect, in that resources remain stuck in inefficient uses, while the more efficient industries suffer retarded growth. Hence, plant closing laws could do harm to U.S. ability to compete on world markets.

3. The impetus to higher real income and employment provided by free trade and by capital mobility is lost when restrictions are imposed. The economic benefits of free trade have never been successfully refuted, although seemingly persuasive arguments for exceptions have been commonplace. The employment protection argument is only one of several categories of argu ments favoring tariffs and quotas. The logic of international specialization according to comparative advantage refutes all such arguments. It is only through the practice of this principle that the most efficient allocation of resources and maximization of production will be achieved. Within a country, capital mobility is necessary to achieve a similar effect.

Let Freedom Prevail

The increasing interest in plant closing laws is a disturbing augury for those interested in a free economy. Economic well-being and freedom are closely intertwined. The benefits of free trade are well-known, but often ignored. The benefits of capital-mobility are not so well-known, but ought to be. En-croachments upon freedom of enterprise such as those discussed here will in the long-run not only fail to achieve their objectives, but are contrary to the principles of economic freedom and will do harm throughout the economy.