TWN Info Service on WTO and Trade Issues (Feb17/15)
21 February 2017
Third World Network
   
United Nations: Austerity-related labour reforms harmful to working people
Published in SUNS #8403 dated 16 February 2017

Geneva, 15 Feb (Kanaga Raja) - Austerity-related labour market reforms promoted by multilateral and regional financial institutions in many developed and developing countries have been shown to not help economies recover after crises, and have instead inflicted substantial harm on working people, which will be felt for many years.

This is one of the main findings of the UN Independent Expert on the effects of foreign debt on the enjoyment of all human rights, Mr Juan Pablo Bohoslavsky (from Argentina), in his latest report to the thirty-fourth session of the UN Human Rights Council, which meets here from 27 February to 24 March.

In his report, the rights expert observed that many States with unsustainable levels of debt or experiencing a financial crisis have implemented austerity policies and labour market reforms with a strong deregulatory impetus, either on their own initiative or at the behest of external creditors, including international or regional financial institutions.

"Such reforms have often reduced the legal protection of workers and affected the bargaining power of trade unions, with important implications for workers' standard of living, economic equality and social cohesion, among others."

In a number of cases, these reforms have amounted to violations of human rights obligations and international labour standards, as documented by, among others, the international bodies monitoring these rights, said the Independent Expert.

In his present report, the rights expert challenged what he said is the widespread belief that deregulating the labour market will further growth and employment.

"An increasing number of studies have actually pointed to the positive economic effects of labour standards, including on productivity and innovation. In addition, evidence that downscaling domestic labour legislation has actually helped to ensure economic and financial recovery is weak," he said.

He pointed out that financial crises are usually not caused by excessive labour regulation and labour deregulation does not help to overcome them.

In fact, he said, conventional austerity-related labour reforms implemented during the last years do not seem to have helped countries recover nor have they resulted in restoring access to employment to pre-crisis levels.

Instead, they have undermined labour and other social rights contained in international law.

"It is therefore time to question the conventional wisdom that the deregulation of labour markets is a suitable and legitimate approach for responding to financial crises. Rather, the opposite is needed, that is, reform measures guided by the normative content of labour rights contained in international human rights law that foster gender equality, enhance employment and provide better access to these rights for marginalized groups and individuals," said the rights expert.

According to the report, in many developed and developing countries, austerity-related labour law reforms have been promoted by multilateral and regional financial institutions on the assumption that they will lead to economic growth and thus prevent or help overcome debt crises.

They have often recommended or insisted, as part of their lending conditionality, that the labour market be made more flexible through deregulation, downsizing the public sector and freezing or reducing wages and work- related social benefits in an effort to reduce government expenditure.

"Austerity measures and labour market reforms have often contravened the international human rights obligations of States, eroded labour rights and resulted in the retrogression of work-related gender equality," said Mr Bohoslavsky.

They have contributed to an increase in inequality and insecure and informal employment; fostered discrimination in the labour market towards young and older persons and individuals belonging to marginalized social groups; and resulted in the reduction of unemployment benefits and other job-related social protection.

The rights expert noted that the mainstream assumption that labour rights are generally detrimental to economic development has been challenged at theoretical and empirical levels and it has been shown more concretely that austerity-related labour market reforms do not usually help economies to recover after crises.

"Actually, these reforms have not improved economic performance; instead they have inflicted substantial harm on working people, which will be felt for many years."

Financial crises can affect labour rights in a number of ways. Obviously, financial crises may reduce economic growth and employment and impair the right to work, said the report.

However, in addition, governments have often undertaken reform measures that directly affect labour rights such as reduction in wages and employment in the public sector aimed at reducing public expenditure or labour market deregulation in the private sector purportedly to increase competitiveness, or indirectly such as by creating economic conditions which increase pressure on workers, reducing wages or threatening employment, for example, through privatization of public enterprises, trade liberalization or cutting domestic subsidies.

While the links between debt crises and labour law reform are complex, it is safe to say that unsustainable public debt levels often play a key role in a government's decision to adopt economic adjustment reforms, with various implications for labour rights.

In this regard, said the report, the stimulus for reform can come from external actors, notably key creditors of the State concerned, while, in other cases, the political impulse for reform policies has stemmed from the Government itself.

"Financial crises and labour reforms can result in a vicious downward spiral that depresses labour rights," the rights expert cautioned.

"Increased unemployment and weakened trade unions have the potential to entrench income inequality and stagnation of workers' wages in the bottom half of the labour market and trade unions lose the power to fulfil their traditional role of contributing to redistribution".

Consequently, workers may borrow beyond their means to maintain their standard of living; weakened individual and collective labour rights may increase the risk of financial crises which, in turn, may lead to further deregulation of labour markets.

The report noted that labour-related austerity policies have been openly pushed by a number of official key creditors, including the World Bank and the International Monetary Fund (IMF), and together, more recently, with the European Commission and the European Central Bank - the so-called Troika.

It said especially since the late 1980s, labour-related conditionality has featured prominently in IMF financial assistance programmes.

Indeed, around 50 per cent of all lending programmes have involved one or more labour-related conditions over the period from 1994 to 2007.

Since then, the number of IMF programmes with labour conditionalities appears to have fallen, but still, between 25 to 40 per cent of IMF programmes adopted until 2014 contained labour-related conditions relating to the public or the private sector.

"While the IMF has occasionally supported moderate improvements in labour standards, its prevalent stance regarding labour law has been a deregulatory one."

Close to one third of the available letters of intent addressed by governments to the IMF between 1998 and 2005 contained commitments to be flexible with labour market regulation.

Early cases can be tracked to the 1950s, such as when the IMF required Argentina to control wage increases.

Adjustment measures implemented during the 1980s in the context of the Mexican debt crisis entailed a considerable reduction in both the number of public employees and their salaries, among others.

In recent years, austerity-driven labour law reforms have remained a widespread trend, said the report.

No fewer than 89 countries implemented such reforms between 2010 and 2015 and more than half (49) of them were implemented in developing countries.

In addition, 130 countries had reportedly implemented or were contemplating cuts in or caps on public-sector salaries, more than two thirds (96) of which were developing countries.

According to the rights expert, in the context of the eurozone crisis, labour law reforms have been particularly far-reaching.

Crisis-stricken eurozone countries have notably adopted legislation to reduce the economic costs of laying off workers.

This was done through measures such as cutting severance pay, shortening notification periods, lowering the protection against unfair dismissal and easing the rules on collective redundancies, among others.

Austerity measures and economic reform programmes have often conflicted with the human rights obligations of States. These range from minor interferences with - to complete negation of - relevant rights and cover a number of issues, he said.

According to the report, international financial institutions and national development banks must also respect labour rights when providing loans to States and imposing the condition to implement certain fiscal and macro-economic reform policies.

"If implemented, fiscal consolidation programmes must fully respect human rights standards as must borrowing States and lenders, including lending international organizations and States. Both lenders and borrowers have an obligation to carry out a human rights impact assessment prior to the provision of a loan, in order to ensure that the conditionalities do not disproportionately affect economic, social and cultural rights nor lead to discrimination," Mr Bohoslavsky underlined.

In several instances, he noted, the economic adjustment reforms undertaken by States have created tension with regard to the right to fair remuneration.

Labour law reforms facilitating the hiring and layoff of workers have led to tensions with regard to human rights obligations.

Trade union-related rights have also frequently been affected by labour law reforms undertaken in the context of crisis-related economic adjustments.

Adjustment reforms undertaken to prevent, mitigate or overcome sovereign debt crises have affected workers' human rights on a number of occasions and in various ways.

In a study that examined data on 131 developing countries over the period from 1981 to 2003, it was found that the longer the time span during which a country was subjected to a structural adjustment programme sponsored by the IMF and the World Bank, the lower the level of protection of labour rights in its territory.

Another study that analysed data from 123 developing and emerging economies found a significant negative relation between IMF and World Bank programmes and collective labour rights, notably with regard to workers' freedom of association and the right to collective bargaining, both in law and in practice.

"This adds to the literature on the impact of currency crises on labour standards, which found that such crises reduce the aggregate labour share, notably in the manufacturing sector, and lead to a decline in real wages and higher general and youth unemployment, among others," said the rights expert.

Workers' wages have very often been affected by economic adjustment reforms, he noted.

A study of 110 countries identified a negative effect of IMF financial assistance programmes on the labour share in the manufacturing sector.

IMF and World Bank-sponsored adjustment programmes implemented in the 1980s reportedly went along with the drastic declines in real wages in a number of developing countries.

Trade unions have also been weakened in countries undertaking economic adjustment. A study using data on 39 least developed countries, carried out during the second half of the 1990s, showed that the signing of an IMF loan arrangement and debt service was negatively associated with the level of unionization rates.

"The privatization of public companies promoted by IMF and World Bank-driven adjustment programmes has, in several developing countries, such as India, furthered the fragmentation and weakening of local trade unions," said the report.

Labour market reforms undertaken during the European economic crisis heavily affected collective bargaining in the countries concerned.

For example, said the report, Greece saw a strong decrease in sectoral collective bargaining combined with the spread of company-level agreements by non-union organizations; in Romania, the 2011 labour law reforms heavily affected trade unions' capacity to engage in effective collective bargaining at the national and sectoral levels; and in Portugal, the number of collective agreements adopted per year dropped dramatically between 2008 and 2012, as did the number of workers covered by those agreements.

The weakening of labour rights under structural adjustment programmes has entailed adverse implications for other human rights, said the rights expert, pointing out that in Zimbabwe, for example, substantial layoffs in the public sector, among other factors, reportedly pushed a number of workers and their families into poverty and homelessness, affecting their right to food and adequate housing.

"Austerity-related labour law reforms undertaken in the course of the eurozone crisis are - together with reforms of pension systems - expected to result in widespread old-age poverty," Mr Bohoslavsky warned.

In Greece, the income loss brought about by the austerity measures, labour law reforms and the scaling down of the public sector have led to an increase in poverty, in particular among workers in the private sector, which has been exacerbated by the lack of a social security system capable of providing for sufficient relief.

Other adverse effects concern the quality of the public service. Reductions in public servants' salaries can affect productivity in the public sector, which, in turn, lends itself to an argument for privatization or additional wage cuts.

In Cote d'Ivoire, reductions in teachers' salaries, as recommended by the IMF and the World Bank, appear to have had a negative impact on education quality, owing to cross-border brain drain.

Finally, said the rights expert, IMF and World Bank-sponsored adjustment programmes have, in some cases, been associated with violations of civil and political rights.

For example, since the 1950s in Argentina, IMF programmes have repeatedly been accompanied by violence against trade unions opposing labour market-related measures, involving, among others, crackdown on protests and imprisonment of union leaders.

"In numerous countries, the effects of austerity policies have led to protests and riots, often accompanied by the disproportionate use of force by law enforcement officials against demonstrators and resulting in violations of civil and political rights."

He emphasised that the assumption that labour rights are generally detrimental to economic development has been vigorously challenged at the theoretical level and refuted by empirical data.

"Evidence that austerity-related labour market reforms have contributed to economic recovery after debt-related economic crises is weak. Sometimes it appears that debt crises have rather provided a pretext to push through labour market reforms favouring business interests rather than addressing economic problems. It is therefore not surprising that debt crises frequently exacerbate economic inequality."

According to conventional wisdom, labour legislation, in particular employment protection legislation, is a main obstacle to economic growth and employment.

In this regard, the Organization for Economic Cooperation and Development (OECD), IMF and the World Bank have advocated that high labour protection standards are a driver of unemployment, among others, and should be scaled down.

"Those views have, however, been challenged on a number of fronts," the Independent Expert noted.

With regard to developing countries, evidence of a negative impact of labour standards on a country's economic performance appears to be weak.

While relevant data on developing countries is scarce, research on Argentina, for example, suggests that labour market deregulation seems to have reduced employment elasticities instead of increasing them.

A study analysing data on various countries from 1985 to 1994 found that higher labour standards correlated with lower levels of corruption, among other positive effects.

Overall, said the report, research suggests that the economic implications of labour legislation are significantly complex, vary across countries and economic sectors and can, more importantly, even increase economic efficiency, depending on the context.

In many cases, said the report, "factors other than labour standards seem to play a stronger role in influencing economic outcomes. The economic case for dismantling labour standards, including in the area of collective bargaining and dismissal protection, is, hence, weak."

If encroaching on labour rights does not have any justifiable benefits, even for rights holders who are outside the labour market, and if downsizing labour rights does not lead to enhanced enjoyment of economic and social rights for all, such retrogressive measures cannot be considered as permissible and justifiable responses to financial and economic crises, the report stressed.

Empirical findings overall do not seem supportive of the claim that labour law deregulation fosters recovery after economic crises, said the rights expert.

Evidence from Latin America suggests that reforms that deregulated individual and collective labour law in Argentina, Bolivia, Brazil, Chile, Mexico and Uruguay in the 1980s and 1990s, led neither to less informal employment nor reduced employment instability, which saw an increase during that period.

"Indeed, in several Latin American countries, the weakening of employment protection legislation appears to have aggravated the precariousness of work with little evidence of improved employment performance."

The economic effects of the austerity measures taken recently in the context of the eurozone crisis appear to be similarly weak.

Research suggests that the European Union countries that performed relatively better during the economic crisis of 2007 to 2011 were those that had less flexible labour markets.

Overall, said the report, there is little evidence that labour market deregulation furthers recovery in the context of financial and economic crises, while the negative impact on economic and social rights is substantial.

"This also highlights the potential relevance of other factors behind deregulatory reforms that undermine labour standards, such as ideological bias and non-explicit retrogressive distributional agendas," it added.

The rights expert underlined that it is essential to submit austerity-related reforms to robust human rights impact assessments before they are carried out.

First of all, any such impact assessment should include an assessment of the impact of such measures on the population, including whether there are any viable human rights compliant policy alternatives to austerity reforms, before they are carried out and should recommend policies that meet the economic needs of the country in a manner that fully protects human rights.

Too often, the measures taken, as in the case of European austerity, have not improved the economic situation, but have, simultaneously, substantially worsened the human rights of millions of people, he said.

Human rights impact assessments should feed into both the policymaking of the State considering reforms as well as that of the external actors recommending or requiring such reforms, such as international financial institutions, the rights expert added.