Plant closure notice means lost jobs

A TRADE bill likely to become law in the near future requires that companies give advance notice to workers of impending plant closing. The clear intent is to benefit workers, primarily by allowing them time to find new jobs. Unfortunately, the provision has negative consequences for both workers and employers. Most American proponents of advance-notice provisions ignore any adverse effects on length of the workweek, perhaps because they believe such effects to be small. In Europe, however, these effects have been real and troubling.

European countries have adopted a variety of advance-notice requirements, and many countries have changed their policies over time. The natural experiment they have performed provides cross-country and before-and-after comparisons with unambiguous results: Notice requirements reduce average hours worked per employee. Since part-time and temporary workers are generally exempt from notice legislation, the law induces firms to move from permanent and full-time workers to temps and part-timers.

Six European countries (France, Germany, Ireland, Portugal, Sweden, and Britain) went from no advance-notice requirement to an average of 2.8 months' notice required for workers with 10 years of service, with corresponding amounts required at other years of service. Average hours of work were about 2 percent lower in these countries after the notice requirements were begun. Of course, other changes occurred in these countries during the time period, which could account for the reduction in hours worked. But even when other factors are taken into account by performing a systematic analysis of 29 years of data from 23 countries, the result is a substantial negative effect of notice requirements on hours worked.

If the United States can take a lesson from Europe, then adopting a 60-day advance-notice requirement with exemption for part-time and temporary workers will result in the conversion of 1.61 million jobs from full-time to part-time. Beyond that, large increases in the proportion of the work force that has temporary status can be expected.

Why is less work the main effect of legislation that is intended to protect workers? Employers who are restricted from laying off workers ``at will'' are more reluctant to hire workers. Although notice requirements do not prevent layoffs, they raise the cost of labor, because employers are forced to retain workers when business conditions are poor. An employer faced with an unexpected decline in demand for his product cannot immediately adjust by laying workers off. Instead, workers to be laid off continue to work and must be paid an additional $4,000 to $5,000 on average, before their two-month notice periods expire. This is not a trivial cost.

If short-term workers were included in notice requirements on plant closings, employers would become similarly reluctant to hire temporary workers. The likely effect is a reduction in the overall number of available jobs. But if, as is customary, legislation exempts short-term workers from advance-notice requirements, employers can partially evade the law be shifting to part-timers and temps. Although there is nothing wrong with an economy that offers part-time and temporary work to those who want it, it is undesirable to induce this change by legislation - certainly as an accidental and unintended result of a bill with quite a different stated aim.

Switching from full-time to part-time work lowers productivity and is socially wasteful. Temps are less motivated to raise their on-the-job productivity, since they are unlikely to be around to reap the benefits. Valuable time is lost in frequent processing of new-hire paperwork, orientation, and training. Society need not incur such added costs as the extra gasoline and road usage of duplicate commutes when two part-timers replace one full-time worker. All these factors reduce productivity - and worsen the global trade pattern.

A trade bill that seeks to impose notice requirements on plant closings must either exempt part-timers and temps and thereby legislate a shift to those types of jobs, or cover part-timers and temps and lose jobs entirely. Neither strategy is likely to help American business compete in international markets.

The trade bill itself is questionable. But even if policymakers decide that it warrants passage, elimination of the advance-notice provision would benefit American workers and business.

Edward P. Lazear, senior fellow at the Hoover Institution, is Isidore Brown and Gladys J. Brown professor of urban and labor economics at the University of Chicago.

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