The Stone City

Words Made to Last

Tuesday, November 29, 2005

Lean and Mean

In the United Kingdom, new fathers are entitled to two weeks' paternity leave [with minimal pay], and mothers to six months. In France and Germany, the policies are still more generous. In Germany, with its emphasis on job security [and chronic lack of jobs], a guarantee even of unpaid leave has substantial value; either parent may take up to three years of such leave.

For interchangeable employees at large corporations -- the undifferentiated "labor resources" that these policies are designed to protect -- such a long absence might not be considered a burden on the employer. In a static economy, a similar job can be expected to be available for the returning employee, even after three years.

But if companies are smaller, so that there is less redundancy and interchangeability, this is no longer the case. And even a large company, if it has a diverse or rapidly changing business [like the large investment bank I work for], will have many employees whose function is unique. It is clearly not in the employer's best interests for such an employee to go on leave.

The European policies place the cost of such a departure squarely on the employer [to the extent this is possible]. But there is a real economic cost to this departure -- that is, after all, why the employer does not desire it. As they are less able to deter departures, employers must act to reduce the resulting cost to themselves.

The simplest and most effective mechanism is to move operations out of Europe. Thus investment banking is dead on the European continent [except for a few French banks indifferent to revenues], and corporate science is apparently dying.

Employers can also mitigate the costs of protracted parenting leave by ensuring that every employee is redundant. This increase in redundancy will of course cause an immediate loss in efficiency, and its second-order effects will likely also be negative -- as individual responsibility is diluted, initiative is less rewarded. Thus small, innovative businesses will form less often, and growth initiatives within established companies will be rarer and on average less successful.

So far, we have not been completely fair to Europe, since this is an economic critique of a social policy which is meant to increase security, not wealth. So let us consider the tacit agreement, in America at least, between high-value employees and their employers.

Each employer understands the risks of losing a key employee, even temporarily, and each employee understands that he can only gain exceptional responsibility by demonstrating a commitment to his employer's needs. It is rational for employers to seek out and reward such employees, and rational for some workers to agree to this bargain. This is the underpinning of all the management consultants' talk about "commitment" and "motivation".

For parental-leave legislation to work as intended, those taking the leave should not be at any disadvantage. However, we have just seen why this is unlikely to be the case: it is equivalent to forbidding preferential treatment of committed employees. We can only offer this protection by making it illegal for exceptionally hard workers to get ahead.

The wealth of a society is based on how much its workers can create, and on very little else. Yet somehow governments are always attempting to decouple the two, at the individual level. This is intrusive -- perhaps some people are willing to work very hard to get ahead, and the state should permit them to make this choice -- and also inevitably wealth-destroying.