A Hungarian Entrepreneur Laments

LvMIC:

Originally posted on July 27, 2011, this simple explanation on the dangers of labor regulations “rocked the Hungarian blogosphere” with over 90,000 Facebook likes.  I picked up on it from Off the Street via RealClearMarkets.com today.

When economists and writers favorable to the free market warn about the damaging consequences government intervention inevitably brings, this anecdote is exactly what they are talking about.  Here is an entrepreneur convinced his business will thrive by providing the best service to consumers.  Such a statement is tongue and cheek of course, but the author is making a point that even if success is guaranteed, which it never is in a market economy, the regulations put in place by politicians have the exact opposite effect of benefiting the worker.  Case in point: women and the elderly:

I wouldn’t hire a woman.

Don’t get me wrong, I don’t have any problem with women giving birth to children. That’s how I was born and that’s how my child was born. I wouldn’t hire a woman because when she gets pregnant, she goes for a 3 years maternity leave, during which I can’t fire her. If she wants two children, the vacation is 6 years long.

Of course, work has to be done, so I would have to hire somebody who works instead of her while she is spending her long holiday years. But not only I couldn’t fire her while she’s away, I couldn’t fire her when she comes back either. So I would have to fire the one who’s been working instead of her for the whole time. When a woman would come back from the maternity leave I would be legally forced to increase her salary to the present level in her position, and also, give out her normal vacation days, that she has collected during the maternity leave. When she would come back to work, she would start with 2-4 months of fully paid vacation.

Laws seeking to help women by guaranteeing them benefits such a maternity leave in actuality make them less hireable.  It’s simple, if you increase the cost of labor, less is demanded.  The author makes the same point with those over the age of 50.  Since regulations make it much more difficult to fire an employee, employers must seek out the most fit candidate as opposed to taking a chance on a protected class.  Why invest in the 53 year old woman when a 22 year old man is more liable to stick around and not bring arbitrary lawsuits based on age or gender discrimination?

And then comes the mandated vacation days.  There is no greater political fodder than promising vacation days to voters who naively believe no opportunity costs are involved.

I would also have to take into consideration, that a 35 years old person is entitled 25 days of vacation per year. That means 1 extra month of working days. If I needed 12 persons’ work, I would have to employ 13 to account for the one who’s on vacation.

The VAT tax, which is nothing more than another method to take for granted an already stifled economy, provides even more of a burden on business owners.

I am not greedy, the market is tough too, I would markup my prices with 20% profit. This would increase my hourly rate to €30, that is pronounced as thirty Euros plus VAT, €37,5. I would round this sum (down), so our customers would pay €37 / hour for our service.

Out of this €37, 7 would go directly to the state, 30 would be company income.

As Rothbard succinctly demonstrated, producers must bear the burden of VAT taxes; they are not passed along to the hapless consumer:

A further crucial flaw exists in the VAT, a flaw which will bring much grief to our economic system. Most people assume that such a tax will simply be passed on in higher prices to the consumer. But the process is not that simple. While, in the long run, prices to consumers will undoubtedly rise, there will be two other important effects: a large short-run reduction in business profits, and a long-run fall in wage incomes.

The critical blow to profits, while perhaps only “short-run,” will take place at a time of business recession, when many firms and industries are suffering from low profits and even from business losses. The low-profit firms and industries will be severely hit by the imposition of VAT, and the result will be to cripple any possible recovery and plunge us deeper into recession. Furthermore, new and creative firms, which usually begin small and with low profits, will be similarly crippled before they have scarcely begun.

The author’s claims on the effect VAT taxes have in promoting unemployment are echoed by Rothbard:

The VAT will also have a severe, and so far unacknowledged, effect in aggravating unemployment, which is already at a high recession rate. The grievous impact on unemployment will be twofold. In the first place, any firm that buys, say, machinery, can deduct the embodied VAT from its own tax liability; but if it hires workers, it can make no such deduction. The result will be to spur over-mechanization and the firing of laborers.

Secondly, part of the long-run effect of VAT will be to lower the demand for labor and wage incomes; but since unions and the minimum-wage laws are able to keep wage rates up indefinitely, the impact will be a rise in unemployment. Thus, from two separate and compounding directions, VAT will aggravate an already serious unemployment problem.

The author goes on to conclude that investing his time, effort, and capital into a business in which the cost of labor has been artificially inflated through governmental mandates is not worth it.  The only way he (assuming a man is writing this) will offer employment comes down to five simple requests:

I will only give a job if:

1. I can fire you, if I want to.
2. If VAT goes down to at least 20%, better yet 15%.
3. If the state takes away “only” 30% of your money.
4. If higher income is not exponentially punished.
5. If the state punishes corruption instead of decent companies.

It helps to think about what this aspiring entrepreneur is really asking for in regards to how he runs his business.  Here is someone who is quite literally risking their livelihood in order to produce for consumers who will or will not purchase his services no matter what the quality.  It is his wealth that he is risking, he is only asking to do with it what he sees fit for any potential employee who voluntarily commits to working for him.  Desiring the ability to fire an employee at will is not evil, it is simply looking to use his property- his money and capital- as he sees fit.  Often times, politicians take for granted the market economy which they feel compelled to control and produce outcomes they see as desirable.  Making it incredibly difficult for employers to fire workers and imposing such things as vacation days and maternity leave may win the next election, but it comes at the expense of a robust economy.

It’s easy to see why this blog post received so much attention.  The often unheard tale of a small businessman navigating a sea of disastrous labor regulations is compelling as it shows the unintended effects of what are construed as worker protections.  In reality, anything but a pure free market comes as a detriment to consumers and workers as a whole.  Despite some adult language, the post is highly recommended.