Sunday, October 28, 2007

Chavez new constitution: Article 90

Provisional introduction, to be removed later: although the National Assembly has decided to change a total of 69 articles, which is, simply put, a coup d'etat, we are forging ahead with the original 33 articles discussion since they are the articles that really matters, the ones that will most screw up the country. This article 90 is particularly important in this discussion because it is the most populist of the lot, the one that most illustrates how Chavez is trying to buy yet another electoral vote, the most simple minded one, and yet perhaps the most perverse one after the 230 which settles eternal power for Chavez.

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Old Article:
Working hours shall not exceed eight hours per day or 44 hours per week. Where permitted by law, night work shall not exceed seven hours per day or 35 hours per week. No employer shall have the right to require employees to work overtime. An effort shall be made to reduce working hours progressively in the interest of society and in such sphere as may be determined, and appropriate provisions shall be adopted to make better use of free time for the benefit of the physical, spiritual and cultural development of workers. Workers are entitled to weekly time off and paid vacations on the same terms as for days actually worked.

New Article:
With the intention that workers have enough time for their integral development; day-shift work hours shall not exceed 6 hours per day and 36 hours per week, and night-shift work hours shall not exceed 6 hours per day and 34 hours per week. No employer shall force its employees to work overtime. Moreover, it (the subject in the Spanish version is tacit, so I’m guessing it refers to the employer as well) shall program and organize the mechanism for the better enjoyment of workers’ free time in benefit of their education, and human, physical, spiritual, ethical, cultural and technical development.

Workers shall have the right to a weekly rest and paid vacations in the same conditions as regular work shifts.

Well, where do I start? First and foremost, I see no reason why such an article should be in the Constitution. Whether you agree or not with constraining work hours, the Constitution is not the place for this kind of stuff. This could be written in a regular law, if anything.

Before going to the economic analysis of imposing a shorter work shift, let me point out some details of the proposed article. The new article encourages employers to “program and organize the mechanisms for the better enjoyment of workers’ free time in benefit of their education and integral development.” I guess employers know better what’s in the best interest of their employees, do they? Let’s say you have a couple of more hours to do what you please during the day. What would you do? In principle you would choose whatever it makes you happier (in the broadest sense of the word). I hope you agree with me on this. As far as I know that could include going home with your family or to the library, a museum, school, the gym, the church, yoga class, or even your favorite bar. If you feel that you need more education, you would enroll in classes at the nearest college (or any educational institute that suits you), or simply go to the library and pick up a couple of books in Accounting or Philosophy. If you think that you’re a bit out of shape, you would hit the gym, take yoga class, or go hiking to the mountain more often. And so on. More importantly, perhaps, if you think that you have a poor “integral development” (whatever that means) , probably you would do your best to improve in that direction. I don’t see a reason why you wouldn’t. If a couple of more hours daily are what you needed, then you’re all set. Unless one argues that you are shortsighted and myopic, and therefore don’t know what’s best for yourself. Generally that’s not the case. I think everyone one of us has a pretty good idea of what we want, of what makes us happy and better person, right? So, why would our employer organize something for us to do in our free time for our benefit? Plus, if we believe that each one of us has different goals, preferences and constraints, then a one-size-fit-all employer-organized free-time program would not work for all its employees. Unless you think everybody should be and do the same, and their individual differences do not matter.

I personally believe that this little twist in the proposed article does not aim the (shrinking) private sector but the (growing) public one. I can imagine some governmental institution coming up with the idea of organizing one-hour daily workshops on (presumably) some topic of interest for its employees, say “The New 21st Century Man”. I can also imagine that participation in this type of events will not be exactly voluntary.

I also think that this addition to the article is to some extent irrelevant for all practical purposes. Nowadays, the government already coerces its workers to participate in certain extracurricular activities. Thus, I don’t see how they would not organize a “The New 21st Century Man” workshop if they wanted to even without the proposed reform. Now you could say that if they haven’t done it yet, why they would do it after the constitutional reform. Obviously, the “revolution” is moving forward (or is it backward?), and with it, we’ll see all sort of new things.

How about the economic consequences of the proposed article 90? In general, a tighter constraint on work hours cannot make anybody better off as long as we assume that the length of the work shift is an endogenous variable of the economy. Nowadays the limit is 8 hours. Some people may choose to work less than that. Don’t you think that if everyone were better of by working 6 hours daily they would have done that? But they didn’t. So it must be that they are fine with working 8 hours. Of course, you could argue that our evil entrepreneurs are forcing their employees to inhumanly work that much. But I wouldn’t give much credit to that argument because that would mean that there exists a huge market failure that workers and unions wouldn’t have let pass that easily. I have never heard unions seriously complaining about the shift length. If that market failure existed, it’d be in workers’ best interest to fix it. However, for quite some time they were happy with the 8-hour shift. Oh, it could be now that Chavez not only realized of this failure but also came to the rescue of the people. Right!

Now, let’s analyze the short-run consequences of the new article 90. Bolivarian revolution wisdom would tell you that the people is going to benefit with this because they will be able to enjoy more leisure (which everyone agrees is a good thing), at least those who have a job, and earn the same amount (as far as I know monthly salaries are not going to be initially cut because of the shorter work shift). However, there is no free lunch. Something’s got to give. So, what’s the cost of this? First of all, everything else equal, total output (GDP) is going down (1). In particular, private sector output will take the biggest hit. Public output will not suffer that much because it is largely inefficient. However, the quantity (and perhaps quality as well) of the few public goods and services the States provides will fall and taxpayers will get less for their money.

Thus far we have made a big assumption, namely, employment does not change. Bolivarian revolution wisdom would tell you here that employment is actually going to increase because firms are going to hire more people to make up for the difference. Oh boy! I beg to differ. In fact, employment (unemployment) is going to fall (increase). Why? Keep in mind that our evil entrepreneurs are profit driven whether you like it or not, right? Given prices, salaries and employment constant, when firm’s output falls, so does its profits. Remember that its wage bill is constant up to this point. So, what does this firm do? It has several alternatives. One is to adjust the number of workers. Let’s try first with hiring new workers. I can assure you that it ain’t happening. Why? Well, if it were profitable to hire a new worker now, it would have been profitable to do so before. Since the firm didn’t hire any new worker before, then it must be that it wasn’t profitable to do so and it still isn’t now.

The firm then has two other options, keep the same workers or fire some of them. If there were no firing cost and other restrictions to firing, some firms would probably lay off some of its workers because possibly some workers might “bring to the table” less than what they are paid, that is, their productivity is less than their salary. With firing restrictions, firms would lay off less people or even none if these restrictions are cumbersome enough.

Another alternative that firms have is simply to increase prices and, hence, more inflation. This is a way to adjust real wages down which would mitigate the drop in workers’ productivity. When real wages fall, the negative impact on employment explained above is reduced.

For some firms price adjustment is not an option because either they face government price controls or international competition. Some of these firms might see their profits go towards the red side, and have only one alternative. That is, to shut down. That means that unemployment will rise.

Therefore, in the short run, shortening work hours by law will only bring a combination of more unemployment, inflation, and a drop in real wages. Everyone will be worse off. For the unemployed, it will be more difficult to find a job. Some workers will be laid off and the rest, the lucky ones who kept their jobs, will be poorer.

The long-run analysis is a bit more complicated. However, I can point out some bad consequences of this measure. First, since workers are less productive, private investment will fall further, which will have a negative impact of job creation and long-run unemployment. Moreover, Venezuela will be even more dependent of oil and the public sector will more important. You could argue that the drop in private investment will be offset by increasing public investment. That could be, but in any case, public capital is going to be less productive because of the shorter work shift. So, to produce the same amount of public good it will take more public investment, meaning that there will be more taxes and less consumption.

In the long-run, this measure could also have an important negative effect on human capital accumulation. Since workers are going to be less productive (both because of the shorter shift and because of a lower capital stock), their real wage necessarily has to go down. That has a negative impact on the return to schooling, which will dampen the accumulation of human capital and, in consequence, workers’ productivity further.

In summary, putting more limits on work hours is not going to make anyone better off. I cannot think of anybody who would benefit from this. Moreover, the poor are the ones who are going to be hurt the most.

1) Why? Assuming employment does not change, if everybody works fewer hours, they are going to produce less. Unless you come up with some crazy argument in which workers will put more effort on those 6 hours up to the point where their average daily productivity remains the same. If that’s the case, why didn’t they do it long before?

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Manuel contributed this piece from a well known Spanish campus.

He can be joined at: venezuela. constitution. trap @ gmail. com

-The end-

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