The Morality of Layoffs

Arruñada, Benito (2010), “The Morality of Layoffs,” Cinco Días, Febreruary 12, p. 14.

In Spain, you can be forgiven for just about everything, except for heresy. A few days ago, the media inquisitors did their utmost to burn Adolfo Dominguez at the stake of disrepute. He had said something that many people think in private but are reluctant to state in public: that Spain should change its laws to allow what is wrongly known as “free dismissal”, that is, the negotiation of dismissal by the parties to the employment contract.

The term is wrong because in countries where such freedom to negotiate exists, parties may, or may not, include in the contract wording to the effect that dismissal requires the company to pay compensation to the worker or that a worker terminating a contract must pay compensation to the company.

A wide variety of employment formulae exists. Contracts can be drawn up based on collective agreements or without any trade union participation in the form of individual contracts, and they may include either explicit compensation (which can therefore be enforced in the courts) or implicit compensation (based on the company’s need to preserve its reputation in order to continue hiring employees).

The formula is chosen depending on the conditions in each case. There will be greater restrictions if guarantees are needed when investing in physical or human capital because the value of such investments depends on continuation of the relationship in the long term. (Such capital has been known as “specific” assets since the studies by Oliver Williamson, the 2009 Nobel prizewinner for Economics). Companies are only too willing to offer permanent jobs when they need a stable workforce in the long term. The permanent jobs of Japan are the paradigm, but in fact there is no need to look outside Spain. The Spanish Corte Inglés department store gives its employees better conditions than those required by law.

Free employment contracts are less restrictive for activities in which it is in the interests of both sides—employers and employees—to maintain a possibility of termination at will. This may be in the interests of workers because they wish to protect themselves against selection errors and the presence of shirkers.

This is the opposite of what happens in Spain, where it is not unusual for a team of workers to include some incompetent members or skilled skivers. Many workers tolerate such opportunism, perhaps believing it is the employer rather than they themselves who pays the cost of such idlers. Fishermen are a noteworthy exception. When a sailor shirks his duty, his colleagues report him to the employer, insisting he be replaced the next time the boat sails. It is no coincidence that they are customarily paid a share of the catch.

It is true that free dismissal may entail difficulties, especially if there is no competition, or when bargaining power is unbalanced. But such difficulties are not always present, which is what our laws assume. And, anyway, there are many ways of resolving them, with solutions through trade unions (agreements), laws (on compensation to be paid for dismissal) and the courts (regulation by judges of employment contracts, similar to that for adhesion contracts). These solutions can be flexible as the problems involved are relatively manageable and do not cause the high degree of opportunism that is caused by today’s stringent rules.

Such extreme laws only protect the elite of workers who have little need for protection, that is, civil servants and the employees of large corporations. Much in the news today is the blackmail being exercised by air traffic controllers. But this is not essentially very different from the pressure being applied by workers in the automobile sector, who are making the survival of the auxiliary sector dependent on state subsidies to manufacturers to ensure that the latter remain in Spain and continue paying them their inflated wages.

Given the penury of the other half of Spain, the half that does not work for the public sector or a large corporation of this type, it is especially important to denounce the unconscious hypocrisy of those who oppose freer negotiation of working conditions. It is unconscious because they believe in their moral superiority. And it is hypocrisy because the elite workers reap dual benefits from the current situation—they end up without competitors, and their competitors are at their service.

For all these reasons, I feel Adolfo Dominguez should be doubly congratulated. He is one of the few entrepreneurs who dares to say what he thinks in public, and his diagnosis is right. Only sensibly regulated contractual freedom can achieve prosperity and justice in an open society.

For centuries, bad theology prohibited money-lending against interest. But this did not prevent part of the Church from benefiting from the purchase of perpetuities, a sort of indefinite loan. The new orthodoxies sometimes behave in a similar way. When Spanish trade unions act as employers, they too avoid permanent contracts.