Why precarious work deepens the crisis

By Guglielmo Forges Davanzati

According to the CGIL union, workers employed with temporary contracts earn an average salary of about € 800 per month in Italy, and are predominantly based in the public administration and in the South. The OECD certifies, with respect to our country, that temporary work affects mainly young people under the age of 25 years and, more importantly, the number of temporary workers in relation to the working population has more than doubled over the last decade. In particular,over the last year there was a significant increase (of the order of 4% ) in the proportion of people hired with fixed-term contracts compared to the previous year.

These figures lead us to two questions: what are the possible causes of the labour market insecurity in Italy? And what are the effects of  labour market deregulation policies?

One possible answer to the first question is in the reformulation of the Marxist theory of ‘relative surplus population’ in the phases in which the employment rate is rising,  the bargaining power of workers is increasing, implying an increase in wages and a reduction of profit margins. A variant of this argument would be, if the bargaining power of workers is high, not only is it expected that wages are high, but it is also expected that the working conditions are better, or – with regard to issue posed here – that the contracts of employment are more favourable to workers. Excluding the hypothesis according to which a “permanent job is monotonous,” [an unfortunate comment by former prime minister Mario Monti, who passed labour ‘reforms’] and that, therefore , the workers prefer, as a rule, permanent contracts compared to fixed-term contracts, it follows that the increase of the unemployment rate (as it reduces the bargaining power of workers in the political sphere) increases the incidence of fixed-term contracts.

Myths based on ideological prejudice

It should be noted that supporters of the policies of job insecurity, especially during the early part of the twenty-first century, deployed this argument. It was argued that the policies that deregulate the labour market are necessary because they allow companies to rapidly adapt (and with minimal costs) their workforce in response to the increasingly changing dynamics of demand. It was further said that the deregulation of the labour market is also beneficial for workers, according to the argument (seemingly unassailable) whereby growing profits reduces the likelihood that the company will dismiss workers. And the profits – it was argued – can grow if the company is placed in a condition to use its workforce in a “flexible” way.

It can be said today that this was strongly biased by ideological prejudice. It has never been shown that the demand for goods and services has become, in recent years, consistently more variable. On the other hand, it can be argued that the process of increasing concentration and centralization of capital if anything, have made ​​markets less competitive and, consequently, if anything, have accentuated the “sovereignty of the producer”, which is the typical characteristic of a non-competitive structure that puts companies in a position to decide for themselves the scale and breakdown of production. Today’s huge advertising expenses mean large firms are in any case the only ones able to afford the costs involved.

Effects of  labour market deregulation

The answer to the second question rests on incontrovertible empirical evidence: instability has a negative effect on labour productivity, the rate of growth and the share of wages in gross domestic product (GDP). There is ample empirical evidence that shows that increasing labour flexibility – measured by employment protection legislation or EPL) – not only does not increase employment but, as a rule, it reduces it.

Even more certain, on the empirical level, is the fact that flexibility reduces wages. It should be noted that, in this respect, compared to other OECD countries, the Italian situation is peculiar, for at least three factors. First, Italy is the country in which workers protections have been the most drastically reduced (the Italian EPL over the last decade has reduced the order of 1 .5 % against a reduction in the same period of 0.5 % on average in Europe). Second, fluctuations in the rate of employment is affected both by the limited presence of women in the labour force and, linked to this, the phenomena of ‘discouragement’, according to which, under conditions of high unemployment, low wages and high probability of having to accept a precarious contract, as job seeking is costly and the probability of finding it is low, you give up looking. Third, in Italy, more than in other countries, businesses’ hiring choices are affected by the existence of networks of relationships and family links, which add to the dualism of the labour market and accentuate the social immobility (link).

Why flexible work cuts jobs

The fact that the reduction of the protection of workers reduces employment is explained in the light of at least three macroeconomic effects:

1 ) Flexibility reduces the propensity of workers to consume, because, faced with the possibility of their job contract not being renewed, and therefore,  greater uncertainty regarding future income, workers react protecting themselves from the risk of unemployment by reducing spending, as far as this is possible, with consequent negative effects on domestic aggregate demand. The reduction in consumption, coupled with the increase of insecurity, also comes with two additional causes: the difficulty (if not impossibility) workers  with fixed-term contract have in obtaining loans, and – as regards the insecurity of mainly people from low-income families – the limited availability of resources resulting from the limited savings of their families of origin.

2 ) It should be noted also that the administration of fixed-term contracts reduces the accumulation of human capital (link). That is – and this is especially worrying in an economy, such as the Italy’s, given that there are many small companies, specialised in low-tech sectors –  fix term contracts discourage the acquisition of specific skills, contributing to lower productivity.

3 ) In addition, the adoption of flexible contracts, and overall policies of cost cutting, tend to discourage innovation and the growth of firms. As Keynes pointed out, “if you pay a person more it makes his employer more efficient, forcing him to discard obsolete equipment and methods, accelerating the exit of less efficient entrepreneurs, thus raising the general standard.”

In this sense, flexible labour policies fuel the recession, either because they depress domestic demand, or because they are largely to blame for the modest growth in productivity, which has been the characteristic feature of the Italian economy in recent years.

Guglielmo Forges Davanzati is associate professor of History of Economic Thought and lecturer in Economics at the University of Salento, Lecce

Micromega

Translation/edit by Revolting Europe