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  Union strikes & productivity  


The trade unions and industrialists, who are represented by Federation of Nepalese Chambers of Commerce and Industry (FNCCI), have locked horns over increasing salary and allowance of industrial sector workers. This has halted production, including in Hetauda Industrial Estate. Meanwhile, the industrialists brave enough to resist the unions’ diktat are being admonished and manhandled by party cadres and union activists. The Maoist-affiliated trade union, All Nepal Trade Union Federation (ANTUF) has been the most active and belligerent in the whole union versus industrialist drama. The other two trade unions that are complicating the affair are CPN (UML)-affiliated General Federation of Nepalese Trade Unions (GFONT) and Congress-affiliated Nepal Trade Union Congress (NTUC).

While the demands of the unions are valid as per the existing labor law, the demands are far too stretched in terms of the need and ability of firms to fulfill them. The scale of demand for wage increase is beyond the capacity of most of the firms, which are seeing razor thin profit margins and some are falling short of the minimum demand required to keep up their operations running. In such a situation, demanding extremely high wages that are inconsistent with inflation rate and without a guarantee of an increase in labor productivity shows foolhardiness of the unions, who seem to be motivated to go for strike, not for labor welfare reasons, but for political ones.

The existing labor law has a provision that allows the government to revise minimum wage every two years by consulting both workers and employers. Two years ago, the government had fixed the monthly salary of Rs 4,600 (Rs 3,050 basic salary and Rs 1,550 dearness allowance) and wage of Rs 190 per day. The usual trend is that minimum wage is adjusted with inflation. Since inflation is hovering around 10 percent, it would have been justified if the unions’ demanded for an increase in salary and allowances by the same percent. However, they have asked for an increase in daily wage by more than double the existing amount. The industrialists argue that they can increase salary by 23.7 percent only. But the trade unions want monthly salary to be increased to Rs 10,000 and daily wage to Rs 400. Furthermore, they are demanding additional provisions like insurance, provident fund and social security of workers. So, employers and unions are at loggerheads over wage, allowance and labor welfare issues.

Given the state of our ailing industries, it is pretty much impossible for them to fulfill the unions’ demands. If the unions stick to their guns, then there is no prospect for amicable solution to industrial discord, which is not only reducing production, but also labor productivity and eroding competitiveness of domestic industries. If the industries close down, then it will be the poor workers who will lose their jobs, not the union leaders who are basking under the political blessing and stash of cash from membership fees and (forced) donation. The trade unions should first consider the state of our industries and economy before making wild demands and going on for a strike that will do nothing but decimate our ailing industrial strength, which is essential for bringing about structural transformation in the economy.
Allow me to highlight some of the issues the union leaders and union members should keep in mind before heedlessly going on strike demanding something that cannot be fully fulfilled, at least right now.
If the unions stick to their guns, then there is no prospect for amicable solution to industrial discord, which is not only reducing production, but also labor productivity and eroding competitiveness of domestic industries.

First, demanding pay hike during prosperous industrial periods is reasonable. Unfortunately, this is not such a time. No firm will increase salary beyond the mandatory adjustment of basic wages with inflation if profits do not rise. Worse, for some companies that are just making break-even, increasing salary without corresponding increase in sales revenue will mean losses. Going on strike and halting production will further decrease firm’s revenue, which means not only employment and wage freeze, but also layoffs. By vehemently going into strike, the unions are not only depriving their own members of a potential salary hike in the future, but also employment opportunities to aspiring employees. The tragic fate of the garment and textile industries is still fresh in our memories.

Second, the industrial sector is growing at a very slow pace. It registered negative growth rate (-0.2 percent) in 2009, down from a peak of 18.8 percent in 1992. Fortunately, it recovered slightly last year. Also, the industrial sector contributes just around 16 percent to our GDP and the manufacturing sector just about 6 percent. Against such a backdrop, how can the industries increase salary and allowance, when the scale that is being demanded is not justified by the performance of any industrial variables right now? The willful act of the unions will further worsen the performance of the industrial sector.

Third, factors such as load-shedding, supply bottlenecks and donation campaigns are increasing cost of production of firms. It was reported that according to Small Factory Foundation Survey 2066, load-shedding has already forced closure of 41 percent of medium-scale factories. Furthermore, about twenty thousand workers lost their jobs when five dozen big and small firms closed down in Birgunj-Pathalaiya industrial corridor of Parsa district. In such situation, without a decrease in cost of production, increase in profits is unimaginable. The pay hike (plus bonus and allowance) of workers depends on the rise in profits, which simply is not the case right now, thanks, partly, to destructive activities of the unions themselves. In fact, these factors have led to an increase in cost of production, eroded competitiveness both domestically and globally, and led to a decrease in exports.

Fourth, low appropriability of private returns, i.e. the inability of the private sector to retain returns on investment, is taking its toll in industrial activities and economic growth. Poor property rights and slack contract enforcements engendered by the extralegal bullying of investors by the politically indoctrinated and militant youth wings and unions are falling heavy on the already ailing industrial sector. This is scaring away investors, both foreign and domestic. It will eventually cost the union members their jobs. The more destructive the unions get, the more it is going to cost the workers, industries and the country.

Fifth, remember that the militant activities of Young Communist League (YCL) severely crippled productive capacity and production in the industrial sector. It scared away foreign companies like Colgate Palmolive and shut down several garment firms. They not only harassed businessmen and terrorized business communities by launching donation campaigns and confiscation of private property, but also illegally occupied industrial districts and disrupted production in several manufacturing plants in 2008. The very institution (private property) required for economic growth was handicapped by the YCL and Maoist-affiliated trade unions. In 2009, this was reflected in negative growth rate of industrial sector and a decline in annual GDP growth rate. Furthermore, net foreign direct investment inflow has been just 0.3 percent of GDP. The recent activities of the unions in the industrial sector bear the hallmark of the infamous industrial campaign launched by YCL in 2008. There is no benefit, but all do loose in this endeavor.

Finally, can the unions guarantee that labor productivity will rise by the same proportion, if salary and allowance are increased by the amount they are demanding? If not, then there is no point increasing salary and allowance beyond the one set by the minimum wage law and a simple adjustment with inflation. Note that, Nepal has the lowest labor productivity in South Asia. The labor unions should first convince the government and industrialists that labor productivity will increase if salary and allowance are increased. Only then will their demands be logical. Else, there is every reason to speculate that the drama staged by the unions has vested interests and are politically motivated.
Published on 2011-03-24 01:10:53
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Union Strikes & Productivity
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I don´t think the author is doing a cross country analysis and looking at long term trend. It is Nepal specific and the union´s impact on short term productivity, which is well reflected by the jobs shed, firms closure and revenue loss. Also, the report does not deal with the dangers of a misguided union. Correlation is not causation. Do you really think the unions of the West and in Nepal are similar in their logic and operation? I bet not.

I think the p [more]
  - Bijaya K
Read this book bro, before, come and have a debate on union and productivity

Unions and Collective Bargaining: Economic Effects in a Global Environment by Tlke Aidt and Zafiris Tzannatos, The World Bank,2002. It is a summary of 1000 research studies on unions and collective bargaining.

Little knowledge is too dangerous! [more]
  - Purna Man
Really, Mr Purna? How does the presense of unions guarantee labor productivity? Could you please explain it? You can "guarantee" labor productivity, but by how much? Guarantee to decrease or increase? From what I understand from the reading the unions will guarantee to decrease labor productivity. Do the simple math bro (output divided by workers-- output is decreasing but workers are pretty much the same). How does this increase productivity?

Also, the unions in the [more]
  - Binaya
Buddy, let me tell you, none of the trade unionists will be reading your material. Simply, having a command in writing a material in English does not mean you can write anything.


Do you own research on WB publications or Japanese productivity studies - and then start writing something on unions, labour productivity and minimum wages. Otherwise, your material sounds like a marwari sp [more]
  - Purna Man
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