Acton Commentary

Ethics and Layoffs


With Friday's employment numbers, it is clear that the nationwide unemployment rate is rising a bit, and approaching 6.0 percent. It is about this point in the business cycle when we start hearing calls for government to step in and stop the leakage from the labor markets. The main concern is moral. Truly, though 6.0 is not high by historical standards or European standards, there is a miniature moral drama behind every layoff, one that goes to the heart of the ethical dimension of business life.

Since the economic contraction began, more than 2.5 million people have lost jobs, according to private-sector outplacement data (Challenger, Gray, & Christmas). Though stable in the most recent month, the number of layoffs in the last year and a half is up by 54% over the previous year a half. So far in 2003, job cuts average 118,598 per month.

This is, of course, what one expects in a period of contraction following the remarkable economic boom of the 1990s. A correction is inevitable. In cold economic terms, labor is like physical capital in that it must shift from sector to sector to find its most highly valued use. An economy that doesn't allow such shifts locks in unproductive ventures and can quickly stagnant.

But the data does not reveal the whole story. Inside the numbers are 2.5 million private dramas of personal doubt, confusion, and upheaval. For many, to be laid off is to experience a life-changing event, to come to the end of one road and face a difficult decision concerning the next to take. It is especially difficult in times when job opportunities are not expanding but rather shrinking on the margin (again, an inevitable feature of an economy struggling to recover).

In my private counseling, I've often dealt with people whose concerns for their own economic security and that of their family dwarf any other issues in their life. Fathers who face a future without a paycheck ask fundamental questions about their own self worth, while mothers who are laid off find themselves concerned about clothes, food, and even shelter for their children. Single men and women worry about downshifts in their social status and their prospects for their future. There is often a tendency to rethink one's entire life.

Is it right that such momentous decisions concerning job security should be left to the vicissitudes of the commercial marketplace? The Europeans I speak to find this prospect appalling. In Germany, France, Spain, Italy, and other EU countries, the state imposes every manner of restriction on the right of employers to let workers go or to fire them outright. To cut someone off the payroll is viewed is an appalling act of cruelty, an act of exploitation from which the state must protect the working class. Many interest groups in the US, particularly labor unions, would like to see more such laws in the US.

The same is true of unemployment benefits. In most EU countries, unemployment benefits can last up to two and even five years, and equal 60 to 90 percent of the net earning during the previous year of employment. Along with these benefits come taxes to support them and a byzantine bureaucracy that is necessary to navigate, which requires an investment of time and energy equal to or surpassing that associated with job applications.

By comparison, the US has a relatively free job market in which employers have discretion over layoffs and non-discriminatory firings. Unemployment benefits are modest by comparison to Europe, typically lasting only six months, and are only available under fairly restrictive conditions (laid off, not fired with cause; full time employee, not contract or part time, etc.). They can only be continued through legislative intervention.

Is this a fair system? In a word, yes. On balance, a free market in labor leads to more opportunities for everyone, and reflects a fundamental fairness inherent in a social order of contractual, which is to say, voluntary, labor. Just as an employee is free to leave an employer at any time, the employer is a position to make decisions concerning the workforce of a firm, always with an eye to the bottom line.

Now, this opinion strikes many as heartless and cruel. But in fact, it is simple recognition of individual responsibility. Not the government and not the business sector but the individual is ultimately responsible for managing his or her economic life. He or she is free to seek employment and leave employment while recognizing the freedom of employees to do the same.

The relationship between employee and employer is not one of exploitation, as Marx would have it, but of mutual benefit. They cooperate together in the service of the consuming public. The employer and employee are mutual benefactors, and the most successful labor contracts are those in which both parties are constantly aware of this, and express it in attitudes of humility and responsibility. (The failure of employees to realize this is one lesson of the Parable of the Laborers in the Vineyard. The need for employers to value their employees can be seen as a lesson of the Parable of Great Price.)

Barring intervention of regulators and union official, workers negotiate their own terms of employment to their advantage. In boom times when jobs go begging, the workers have the advantage and can call forth higher wages. These higher wages serve a market function of attracting more workers to the sector that is performing profitably. But in times of relative contraction, the pressure runs the other way, so that workers have less bargaining power over the terms of employment.

The option of allowing employees to terminate employment is to force them to keep a larger workforce than is required to achieve profitability. That is to say, restrictions impose losses on business. These losses are ultimately paid for by the workers and consumers, who might enjoy fewer benefits and wage increases down the line.

When my European friends expressed astonishment that I would defend this system, I simply ask: why would you want to work for a company that you know, in your heart of hearts, does not really want you to be working for it? Why would you want to continue to be employed, not as an asset to a firm, but as a liability? Isn't it rather selfish to insist that someone pay you, not because you are offering anything in return, but rather under duress and fearing for the law?

My questions point to an irony of the free labor contract. The US system encourages the individual worker to think about the good of the whole firm, because his or her fate in that particular job is tied to the good of the entire business. I've talked with business owners of unionized companies who can never quite get over their shock in realizing that their workers are willing to kill the company in order to maximize their pay and benefits. Indeed, there is something fundamentally alarming about that.

Losing a job can be one of the most bracing events of one's life. Yet it is not the end of the road. It could mean accepting a lower salary but it could also open up new opportunities that could prove more fruitful in the future. Nor is one's time with any company or sector a bad investment. All jobs add to human capital the skills and ethics associated with doing a good job and that is something that no one can take from you.

A system of free labor essentially imparts to the worker a sense of his or her own value as a human being. The worker can always know that every job he holds is a result of his own efforts, and every paycheck is a reflection of one's own contribution to the community of work. One can know that his labor is part of a vast matrix of human cooperation, and that one is not a drain on it but rather making the most profound contribution to it.