A Response to Alvaro Santos by Katherine V. Stone

[Katherine V. Stone is a Professor at UCLA School of Law]

In Labor Flexibility, Legal Reform and Economic Development, Alvaro Santos presents an analysis and critique of the World Bank’s Doing Business indicators for labor regulation.  Those indicators have been used to promote an agenda of legal reform dedicated to eliminating worker protections and rights throughout the developing world.  Santos presents a multi-pronged critique directed at the central tenet of the DB project – its assertion that labor market flexibility is the elixir of economic growth.

Santos does an excellent job of decentering and problematizing the concept of flexibility as it is used by the DB project.  For example, he usefully distinguishes three types of flexibility-formal, substantive, and organizational-and shows that the DB claim in the labor area is about substantive flexibility, not formal or organizational flexibility.  Hence the indicators applaud the rigid at-will rule of the common law countries and decry the flexible just-cause standards found in many civil law regimes.  This move alone is valuable because it delinks the DB labor project from the rhetorically powerful but vastly oversimplified claims of the legal origins theoretical framework that underlines the DB project, in which economic progress is equated with common law regimes (seen as “flexible”) and economic backwardness is associated with civil law regimes (seen as “rigid”).

Even more useful is Santos’ demonstration that by focusing only on formal written law, the DB indicators badly mischaracterize the labor law regimes they purport to describe.  Many factors make the law “in action” depart from the “law on the books,” as legal sociologists have long known.  Santos uses examples from Mexico to show that the DB’s characterization of Mexican labor law as rigid ignores several important aspects of the operation of the law in Mexico-the ability of collective bargaining and labor courts to modify seemingly rigid terms of employment, gaps in enforcement of labor rights that insert de facto flexibility into otherwise rigid labor laws, and informal norms that have developed in some sectors that deviate from the formal legal rules.  As one example, he shows the many ways Mexican employers have developed to hire employees on fixed term contracts even when such forms of employment are formally prohibited.

Santos’ most interesting claim is that there can exist multiple regimes of labor regulation exhibiting different combinations of flexibility and employment protection within a single country.  He uses Mexico as an example, and argues that there are three regimes present-an employee-friendly regime (i.e., “rigid” in the DB typology) in the manufacturing and energy sectors, an employer-friendly regime (i.e., DB-flexible) in the restaurant, transportation, communications, and professional sector, and an unregulated free-for-all in the informal sector of retail commerce, street vendors, and domestic services.  He points out a tension in the DB project in that it advocates relaxing the protections for the employee-friendly sector, but increasing regulation in the informal sector.  He also shows that wages have declined substantially in the employee-friendly sector, contradicting claims that employment protection generates high and sticky labor costs.

In these and other respects, Santos illuminates the ideological nature of the seemingly neutral Doing Business labor indicators and shows how those indicators neither reflect an empirically accurate portrayal of the labor regimes they purport to describe nor provide an analytically sound program for reform.  But perhaps his most important contribution is to show that by foregrounding flexibility and relying on seemingly neutral indicators, the DB reform agenda obscures its true objective-to alter the distribution of power in the workplace.  As he says, when flexibility is enhanced for employers, it is diminished for employees.

Santos’ argument would be strengthened if he delved more deeply into the issue of flexibility.   I have two suggestions in this regard.  First, Santos is too willing to trace the DB project’s focus on flexibility as an issue of labor costs.  Like the DB project he criticizes, Santos considers flexibility in terms of employers’ ability to hire and fire, and to adjust labor time, compensation and working conditions unilaterally.  He claims that the DB project does not focus on the role of flexibility in firms’ capacity to innovate.  While this may be true of the narrow DB project, the larger debate over flexibility in labor law has been animated by arguments that firms need more operational and organizational freedom than current labor laws provide.  Operational flexibility is advocated not only to enable firms to engage in short term cost reduction measures, but also to enable them to deploy new production methods and promote innovative product development.  Thus, it is not a sufficient critique of the DB indicators that some of the programs they advocate do not, in fact, result in short term cost reduction.  I believe that, using Santos’ typology, flexibility’s goal is not only substantive flexibility, but organizational flexibility as well. If Santos were to consider flexibility from this larger perspective, he might draw somewhat different conclusions about how to formulate the relationship between flexibility, protection, and economic growth.

My second suggestion is that in discussing labor cost flexibility, Santos should say something about the distribution of risk.  Santos contends that when employers have more flexibility over hiring, firing, compensation, and working hours, employees have less.  Yet his analysis shows how labor market regimes allocate not “flexibility” in the abstract, but actual risks and rewards.  From this perspective, the opposite of labor cost flexibility is not so much rigidity, as the DB project suggests, but rather it is vulnerability.  Hence, Santos’ argument shows that by enhancing employers’ flexibility in the area of labor costs, the DB proposals heighten employees’ vulnerability.