The extension of the layoff ban is often very popular with politicians, who vote it two-handed. It is a way to protect yourself from the criticism that may arise during a crisis: what was done to maintain employment and avoid a jump in unemployment? With such a measure, politicians are likely to keep their jobs, but it is not clear that with them the jobs of the rest of the population will be protected.
There are two basic problems with repressive measures (there are more problems, but I don’t want to bore you). The first question is that although they may have an effect in the short term by limiting the impact (depth) of the crisis, they act by transferring the problem for later, they do not solve anything. That happens with the maximum prices, with the freezing of tariffs, with the exchange rate delay, and also with the prohibition to dismiss: after a while prices and tariffs jump, the peso is devalued, the jobs disappear.
The second problem associated with repression is that economic agents learn and will try to avoid falling into the trap a second time. Prices will rise pre-emptively if freezes are anticipated, hoard dollars and soybeans before devaluation (or an increase in withholdings), and hire fewer workers – particularly fewer blank employees – if they’re a (very) fixed cost.
In the labor market we have learned from the negative effect that bad regulations have: centralized negotiation, statutes that crystallize norms, impediments to hiring temporarily or part-time and high taxes, for example.
Now, we also know that the “reaction function of politicians” is that in the face of a recession, the political spectrum reacts by proposing to prohibit the dismissal of formal workers (from the rest, they cannot). It was already done in 2002 with penalties that originally were to last 180 days and lasted for more than 5 years. It was tried again in 2016 – without success – in the face of a smaller recession. And now it returned as a measure against the recession and deepened with the covid-19
The data does not support the measure, which adds to the negative effect it has on incentives. In effect, during recessions the entry rate (percentage of new hires with respect to the employed stock) falls sharply since the demand for new workers is related to economic activity. When the activity expands in the cycle, the rate increases again – at a rate that depends on growth and also on the contracting rules. In general, the rate of entry exceeds the rate of exit at the boom (which includes dismissals, resignations, retirements) and the greater the difference, the greater the speed of formal job creation. The graph shows that both rates have moved in a very similar way, which explains that, together with the low economic dynamism, formal employment has stagnated since 2010: there were six million formal private wage earners, and today the number is the same. In other words, the most qualified job market has an extremely weak dynamic and presents symptoms of increasing sclerosis. Any expansion of employment is only via the public sector or through informal markets.
The same graph also indicates that it is a mistake to focus on the exit rate. Instead, attention must be paid to the fact that as soon as the economy recovers, the rate of job creation should rise sharply. The job destruction rate, in turn, will be lower if companies foresee a quick exit from the recession – because they have to be prepared for recovery – and instead it will be very high if they foresee that the crisis will continue or that they will not be able to subsist until the end. Therefore, the recommendation is to subsidize formal employment, not to punish dismissal beyond what the law already imposes.
Not convinced yet? The entry rate (seasonally adjusted) has already plummeted to 1.1 in March, that is, it is close to the historical low of the series in the 2002 crisis. This hiring rate was much higher in the midst of the 2018/19 recession (averaged 1.70 until September) but it collapsed from the end of 2019 on the presumption that restrictions on labor mobility were to be established. What is more serious is that it will probably recover very slowly despite the quarantine being lifted, because the reputational damage of labor policy has been done.
In the “new normal”, flexibility will be required for companies to be born and expand in an international scenario that will be hostile for some time. Less state repression and harassment is needed for companies – and with them productive jobs – to prosper.