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Labor Market Flexibility

At present, Nepal's labor market is uncomfortably poised between employers' concern for flexibility and union's demands for job security. Employers are complaining that the existing labor laws are too rigid to meet the challenges of globalization. They are demanding that the management has the immutable rights to "hire and fire" the employees, take necessary disciplinary actions and recruit workers on flexible terms (meaning contract, piece rate and daily wage basis). Trade unions, on the other hand, are complaining that the management is too lax in following the rules and regulations laid down in the Labor Act, they are casualising the workforce and helping further to marginalize the already vulnerable workforce by giving minimum wages, putting them in bad working conditions and generating a sense of job and income insecurity. In the absence of a social security system in Nepal, the job itself has become a source of social security. This is the reason why the trade unions have asked for protective labor laws and to curtail the discretionary power of the management. If flexibility is of any concern to the trade unions then it should be flexibility for the employees, not of the employees. Given the large number (56 percent) of cases filed in the labor Court are related to management's dismissal of workers, the trade unions concern for job security could be easily understood.

Rigidities in Labor Laws

Employers are complaining that the existing Labor Act is the "Act for Labor". It is too protective and biased towards the interest of the workers rather than of the enterprise. The law strips the management of its immutable rights to manage its workforce. Take the case of two major export oriented industries of Nepal, namely, garments and carpet manufacturing industries. The demand for these products is not only uncertain, it is also internationally competitive, In the face of demand uncertainty the management cannot build permanent and stable workforce. The seasonality of the production process adds another complexity. This is the reason for use of contract and temporary workers in the industry. There is also a strong notion (albeit wrong one) going around with employers that once the worker get his/her permanent position, his/her productivity sharply declines. Giving permanent position means less of motivation and more of slackness. Management in Nepal is adept more in using fear instead of Nepal, as a means of employee motivation.

Some explained rigidities of the Labor Act are presented in the accompanying table. The rigidities are related to every aspect of personnel management from recruitment to retirement. Please note how the law has encroached even into the field of employee disciplinary actions.

In order to avoid or evade labor laws management is found to adopt tacit measures. These include high wage payment for non-unionization, subcontracting jobs, recruitment of immigrant workers, non-issuing of appointment letters and, in some cases, opting for the employment of women and children because they do not form unions and are not fussy about employment terms and conditions. This in consequence has resulted in a substantial animosity between management and workers. The number of man-days lost due to labor-initiated strikes and management-initiated lockouts have gone up substantially. In the year 1999 the country lost about 230,000 man-days due to strikes and lockouts. In monetary terms this must be a substantial loss to the economy.

A survey of labor market in Nepal's manufacturing sector done by World Bank in 1999 revealed some interesting findings. These findings have a direct implication to labor market flexibility. The findings are:

1. There is some evidence of geographical and sectoral segmentation of the labor market, reflected in persistent wage differentials across industries and locations.

2. Almost fifty percent of manufacturing labor force is made up of casual workers, who make similar monthly cash earnings as permanent workers but have mush less job security and access to non-pecuniary benefits like health, clothing and transportation.

3. Women are highly disadvantaged in the manufacturing labor market, this is evidenced by their less than fourteen percent share in total employment and significantly lower wages and allowances received as compared to their male colleagues.

4. Labor unions are effective in promoting their members non-pecuniary benefits, but they seem to have little or no influence on union members' monthly earning.

5. Training is beneficial to workers, evidenced by the fact that a formally trained production worker earns about two dollars more per month than a non-trained worker who has the same earning potential. However, firms in Nepal invest little in workers training.

The labor market flexibility is one of the inherent features of modern-day flexible operation system. The buzzwords of management lexicon are flexipayment, flexitime, flexispace. As the process of globalization has considerably squeezed time and space and make it possible for every organization to run twenty four hours a day, the traditional nine to five jobs are slowly dying. In fact, one of the prominent features of globalization is a flexible system. We have flexible machines performing different jobs, flexible time that an employee can work from home or at his pace and time of convenience. With laptops, e-mails and internet systems, we are even talking of flexible space. In a flexible operation system, supply is adjusted to demand and not the other way round. Mass customization replaces mass production system. There is a unique supply for every unique demand. Reduction in inventory costs, shortening the supply of deliveries and doing away with the middlemen are some of the features of modern day manufacturing process. The flexible operation is not only dictated by flexible technology. There is also a demographic element. Increased working life span, coming of knowledge organization and knowledge workers, decline in birth rate and the entry of female workforce all have demanded flexible works system. Because of flexible system, Japanese management system based on life-time employment, seniority based pay system and company based union has come under severe pressure.

Essentially, there are two dimensions of labor market flexibility. First is the quantitative-qualitative dimension, also called numerical and functional flexibility. The quantitative or numerical flexibility refers to management's ability to adjust its workforce strength with the change in production scale. The management can upsize or downsize its workforce as and when necessary. The question here is numerical strength. The qualitative or functional flexibility is a situation by which the management can, through the use of multi-skilling, assign workers to different functions. As for example, a person who is working in administration could be moved to accounting or marketing or even production function as and when necessary.

Another dimension of flexibility external and internal flexibility. In external flexibility the enterprise is able to hive off whole or part of its workforce. This is akin to quantitative/numerical flexibility but it is not necessarily the same. Similarly, in internal flexibility, the company can adjust its workforce internally and again this is not necessarily the same as functional/qualitative flexibility. These two typologies of flexibility can be juxtaposed to form a two by two matrix as shown in the box.

Typologies of Flexibility

ILO has identified four mechanisms to attain labor market flexibility. First, in can be attained through legislation. Enough provision could be built-in within the labor laws to allow labor market flexibility. Second, the collective bargaining agreement (CBA) itself could be used as a plank for attaining flexibility. Concessionary bargaining and productivity bargaining are some examples of recent innovations in the field of CBAs. Thirdly, the individual contracts of employment could also be drawn to attain flexibility. Finally, the management itself could take unilateral actions with regards to flexibility. Many of the examples inserted in the matrix (e.g. parallel production, outsourcing, ancillarisation, QC, team works etc.) could be the products of management's unilateral decisions.

Some examples of Flexibility Drives

Here are some popular modes of labor flexibility drives being used in Nepal. However, attaining numerical flexibility has been the predominating theme of Nepali mangers.

1. Labor Contracts. Now a days, it is almost fashionable to contract out jobs like security guards, cleaning and maintenance staff, gardening and in some cases secretarial jobs like photocopying and typing to an outside agency. Of these, supply of security guards is the most popular mode of labor contract. Because of this a number of labor supplying firms have grownup in the country. Trade unions have opposed this idea of labor contracts. They have held the position that core jobs cannot be contracted out. Recently, in one of the privatized brick factory, the management has contracted out whole of the production job to the workers themselves. Thus is a kind of privatization within privatization.

2. Subcontracting of jobs. This is applied mostly by the large and multinational enterprises. Ancillary jobs like packaging, delivery, commercial ads, research and marketing and storing functions are contracted out to smaller companies.

3. Freezing of new appointments. This is happening particularly in the civil service and state-owned enterprises. The government has literally frozen new appointments, particularly, in the permanent positions.

4. Use of Voluntary Retirement Schemes. This has been undertaken in government jobs and also in the privatized units. Through the use of golden handshakes, the government is leaning. However, this scheme has also backfired in some case where it is often the smart and capable ones to take voluntary retirement and get rehired in the same on other jobs. Interestingly, the lack of liquidity to pay off the staff members have also constrained the government.

5. Extensive use of temporary, contract, daily wage and piece wage system. The management, both in the public and the private sector, has been using extensively these methods of hiring to get rid of long term liabilities associated with permanent workforce.

6. Use of work schedules. Applied mostly in banks and public utilities, new work schedules have been used. Examples may be the opening up of cash counter during holidays and off-hours.

Flexibility as an Agenda for Labor-Management Cooperation

There is a looming danger that the management's use of flexibility agenda may turn out to be a situation of "head I win, tail you lose". This is more so in developing countries where there is no guaranteed social security system and there is over supply of labor. With unskilled workers being marginalized most by the process of globalization, it is natural for the unions to see every move by management to restructure jobs as a threat to their survival. This is more so in a country like Nepal where there exists abundant supply of unskilled workers and, consequently, their bargaining power is less.

The key to solving Nepal's unemployment problem is labor market flexibility. Unless the management is given freedom to fire, they will be reluctant to hire. Even if they hire, they hire in a way that suits them. Most of the issues that the trade unions in Nepal complain about - non-issue of appointment letter, use of foreign workers, use of contract labor - are all designed to attain operational flexibility by the management. But flexibility alone is not an answer to the problems of management. If this had been the case, the Ford Motor Company will not have a policy to maintain temporary workforce at a nominal level. The issues like employee dedication, discipline, innovativeness and loyalty cannot be solved through flexibility alone. An organization must have a cadre that is ready to swim or sink with it.

If flexibility is a matter of necessity rather than a choice to the management, the trade unions have no alternative other than to cooperate with the management. Management too cannot attain its goals through confrontational attitude. In Belgium, labor law has been amended whereby the management has to train every worker before he/she is to be retired from his/her job. The policy is a 180 degree turn in the field of traditional personnel management where workers get trained only at or after recruitment. The flexibility agenda must be a win-win situation both to the workers and the management. The workers and trade unions know very much that their demand for job security cannot go ahead of enterprise security. The traditionally entrenched adversarial relationships between management and workers have hindered effective workplace cooperation. This has to be changed for better labor management cooperation. Some measures for attaining labor market flexibility in Nepal has been identified here.

1. Social Security

If flexibility measures are to be adopted with equal trust and confidence of the unions and the workers, there is a need for safety nets to the workers. However, social security should in no way provide incentive to remain unemployed. Since best security comes from people's ability to look for themselves, this calls for investment in training and development.

2. Human Resource Development Workforce training has been the most neglected side of human resource management in Nepal. Investment in human resource development through multi-skill training provides workers enough confidence in the job market. The trade unions and workers may oppose to the idea of numerical flexibility but functional flexibility is at their interest. It is functional flexibility that provide lifetime employability instead of lifetime job guarantee.

3. Productivity Enhancement

Unless the size of the pie itself is enlarged, there is little to share. Productivity is the key to better labor-management cooperation.

4. Gainsharing

The workers will not put efforts to enlarge the size of the pie unless there is a guarantee that it will be fairly shared. A system must be instituted that rewards will be equitably shared between management and workers. This is more so in case of knowledge workers.

5. Workers' Participation and Involvement

For pretty long, the management has been preoccupied with the negative power of the unions, i.e., their power to say "no" to management decisions. Trade unions do have positive power as well. They can also say "yes" to management decisions. They can equally cooperate and participate in the implementation of management decisions. Technology provides only a potential productivity, the actual productivity is realized through a well motivated workforce.

6. Increased wage rate

Labor must not be treated as a cheap source. As there is a saying " give peanuts and have monkeys". The wage rate must be substantially increased not just for the workers to meet their cost of living but also to value the dignity of labor itself.

7. Gender issues

If flexibility measures have come as a boon to them (because they can adjust household and workplace responsibilities) they have also been a bane on them. There is a need for women protection.

Rigidities in Labor Act: Management Agenda

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