Government's Intervention in The Labor Market

The labor market is the biggest market in any economy. Forget supply and demand; if there is no labor, then such an economy has no future. Besides, it is the only market that is found in every other market. So, what is the labor market exactly? One may ask. The labor market is simply the market that provides workers for all production lines. For a company to be successful and go anywhere, there needs workers who are qualified enough to provide the labor they need. If they don't get these workers, they have no way to ensure their business's success. In any other market, firms are the suppliers, and households are the consumers. But things change in the labor market where households become the supply, and the firms are consumers. In other words, companies offer demand.

A private firm will always come up with its own employments policies and agreements between them and their employees. They determine how to employ workers, and in many cases, fire them based on different cases. Creating a good relationship between a firm and the people that run their production lines is one of the best ways to ensure success.

Despite it being a private issue, there are many instances where the government intervenes in the labor market. First, there are certain jobs that the government provides for public servants, who are elected or employed to serve the common citizen. In more developed countries, the government is the largest contributor to the labor market. They employ more people than the private sector.

Unemployment is one of the biggest threats to economic growth and development. Hence, a government needs to ensure that there are proper laws a guideline on how people are employed, paid, and or fired. Without these policies, many economies would not go far, and governments would fail. Therefore, it is always a good idea to have some form of intervention that ensures this crucial market is always in check.

Economic studies put an emphasis on the topic of government intervention and the labor market as a crucial part of discovering better ways to make the labor market profitable. Where the labor market is not well catered for, the government will have a hard time giving its citizens the services they need. And in this section, we are going to discuss how the governments intervene in this market and why they must do it.

Let's look at the case of the European market. The employment and unemployment experience here varies largely from what happens in the United States. There are different sources of these differences, as you will see by the end of this discussion, which may also help you understand why the labor market is such a big deal in the whole world. We will also be extending into the impact of the market in these two regions. The aim here is to help you understand how different economies are related in terms of the labor market and government activities in these areas.

Why do Governments Intervene in the Labor Market?

In Europe, government intervention in how people get jobs and how firms employ is a common area. For instance, there are so many examples of restrictions on hiring, firing, closing companies, and many other things that relate directly to firs' operation. There are some restrictions that are much similar to what happens in the USA, but not as much as what happens in the European region. One main reason for this phenomenon is that public opinion highly supports such restrictions than they do in the US. Consider this French example, that in 2003, food producer Danone wanted to close two of their factories in France that were not profitable. Such a step would not have been accepted in the US either, and it led to massive protests and other serious factors, including the condemnation of politicians. One would wonder why such a private firm's affair would involve politicians, yet they were not involved in setting up the businesses. Well, it all comes down to the region's economic growth and how workers should be protected against exploitation. The government comes in to ensure proper laws are followed, and whenever possible, offers a better solution to the problem.

It is not only in Europe, where government intervention affects the labor market directly. You will realize that many other parts of the world have these regulations in place. Policymakers are always trying to make sure there is a balance between labor providers and consumers. For instance, China has recently started considering labor regulations very seriously. On June 30, 2007, the New York Times reported in one of their headlines that, "China Passes a Sweeping Labor Law." In this new labor contract regulation passed by the Standing Committee of the National People's Congres, employers are required to give written contracts to their workers. It also puts a restriction on temporary workers' use while making it hard for firms to fire workers as they will.

This came as good news to China's labor market, especially because most workers do not belong in any labor unions. Therefore, the government comes in as a savior, stepping to protect those working in the public and private sectors. There is a huge need for this intervention, mostly because it increases the share of privately owned firms, rather than the government's, which is crucial to the Chinese economy's growth.

Many other parts of the world have been following the same footsteps by creating laws that protect the labor market and many private firms and form collapse. We have seen cases where monetary policies have been employed in reviving economies. The government may decide to give a financial boost to a firm that is on the verge of collapse to revive its operations. We have seen how economic stimulus programs have effectively secured the labor market, apart from offering something more to keep other markets in operation.

Government Policies in the Labor Market

In a nutshell, government policies are a key factor that influences the functioning of the labor markets. And we have seen how these policies differ or relate to different economies. Economists and policymakers hold that these ideas are good to keep a steady economy while creating a good environment where firms can relate well with their workers. But we cannot conclude without looking at how these interventions come into effect. The idea here is to make sure you understand the idea and what rights a person in the labor market enjoys. We will, therefore, look at some of the policies applied.

Unemployment insurance

Unemployment is one of the biggest factors that affect/determine the rate of economic growth. If a government does not put in place properly on employments contracts, chances of falling into trouble are very high. And the economy is seen to be successful when it enjoys the lowest rate of unemployment. When people have a job, they consume products and pay their taxes, which helps the government run smoothly. But where they are not working, it becomes hard to create a good economic environment, as they will be saving more and spending more. Therefore, it is crucial to create a flexible market where people are free to change jobs, especially because many people spend at least some time out of employment.

However, this is only what an economist may say. Even for a short time, losing jobs is a normal aspect of everyday life for many people, which sees them lose their livelihood. When there is a relocation of jobs that benefits the economy, it affects individuals in ways they may never have imagined. It has even caused some people to run into mental issues because they did not know where to start. When firms fall, and people certainly lose their jobs, it is never good for their families. And in many cases, securing another job may not be very easy. It may take many months for them to get back on track, a situation that does not always end well.

Conclusion this is one of the main reasons developed economies have created unemployment insurance to protect the labor force provider. This policy means that anyone who is not employed can register to receive some income from the government. How much one receives depends on where they live and the policies that guide these funds' allocation. The USA is one of the leading economies with such laws, and they vary depending on the state where one resides.

Unemployment insurance is not like buying a car, home, or life insurance. This is because individuals decide for themselves how much they want to invest and when to do it. Private companies offering insurance rely on the fact that not everyone may file a claim at the same time. For instance, car insurance companies know that perhaps only 20% of the cars they have insured will get involved in accidents within a certain period. Things are different from unemployment insurance, where an economic recession can lead to many people losing their jobs and applying for a claim. And the amount you receive, for instance, in the USA depends on how much you have earned over the past year.

We can, therefore, conclude that unemployment insurance contributes to flexibility in the labor market. But then, it is not easy to determine how much unemployment insurance should be offered. If the offer is very generous, then there will be no need for people to work. Therefore, the government puts restrictions on the period of time one has to wait before collecting the insurance fee to incentivize them to look for employment.

The cost of firing workers

If you are a human resource manager of a certain firm in the US and realize that the firm does not supply as much as it should due to poor demand, one of the best ways to cut down on costs is laying off some workers. But did you know that you cannot do this without giving them two weeks' notice? For some companies, this will mark the end of your obligation. However, in many cases, the firm will have to pay the worker their severance payments, as indicated in their employment contracts. Besides this, there must be valid reasons why the worker should be laid off. You cannot, for instance, fire someone based on reasons of discrimination.

Even though employment contracts are usually private matters between firms and their employees, the government may intervene where one is wrongfully dismissed. For instance, HR managers cannot fire a worker for whistleblowing. In some countries, things are much different, and perhaps easier for HR managers than it is in the USA. Generally, certain firing costs discourage private firms from laying off workers quickly, which increases employment and boosts the general economy.

Incentive effects

Making the taxation system progressive comes with a lot of risks. Many people know and agree that the income tax needs to be progressive. However, sometimes the tax rates are too high, affecting people who offer additional effort or labor. Highly skilled and highly paid jobs may be affected even more. The governments need to react with policies that improve such situations to keep people working harder.

Minimum and Maximum wages

Governments make policies that determine the minimum wages workers should receive in certain markets. The national minimum wage is what every working person is entitled to earn even before skills and benefits.

Trade unions

Association of workers negotiates with employers of the working conditions of their unions' working conditions and how much they should be paid. They get involved majorly in wage bargaining, improving working conditions, and ensuring their members' health and safety. They seek to affect the labor market equilibrium. Governments set in place conditions under which such unions should operate.

The government has the largest role to play in the labor market. The economic theory insists on good relationships between producers and consumers within a market setup. The government tries to ensure that there are smooth operations that assure economic development and keep the people in good living conditions.

Author: James Hamilton