Fallacy of Labor Contract Law
Since July 1, the new revised Labor Contract Law comes into effect. Compared with the old version, the highlight of the new revised law is the term of equal pay for equal work, especially for contractor.
For such a change, we should refer to the development of labor dispatching. In China, a labor contract is the main form of employment between individuals and enterprises; in addition, there are other forms, such as labor dispatching. Under labor dispatching, an employee enters into a labor contract with a labor dispatch agency and is then dispatched to work for the ultimate employer pursuant to a service contract between the labor dispatch agency and the employer.
The labor dispatching dated back to the 1920s, and then flourished in the 1980s. The reason why the labor dispatching can emerge and develop is a product of modern social division of labor: some enterprises have the demand for temporary employment, and hiring regular employees does not benefit for the enterprises, so the emergence of labor dispatching can meet the requirements of temporary employment. In this sense, the labor dispatching integrates social labor resources to a certain extent, and promotes the rational allocation of labor resources.
The labor dispatching satisfies the flexible employment of the employer; at the same time, it also brings about some new problems, and a typical one is equal pay for equal work. Originally, the reason why many enterprises use labor dispatching is to meet the demand of temporary employment, but later they find the price of labor dispatching cheaper. Therefore, from the perspective of saving costs, the scope of labor dispatching application is gradually expanded, and even many companies promote this kind of employment form to the permanent posts in non-core departments. In other words, the less regular workers are, the more temporary workers are; temporary workers do the jobs of regular workers, but do not receive the same pay. The purpose for modification of Labor Contract Law is to put an end to different pays for equal work.
But can the revision of legal provisions avoid this phenomenon? In my opinion, it is very difficult. As mentioned before, why the labor dispatching can be popularized in the modern society? A more important factor is to save costs -- the enterprise can hire the required employees at low cost. In a perfectly competitive market, the cost saved by the enterprises will be eventually reflected by reducing enterprise product or service price, etc., and return to the whole society. For this point, the KFC and McDonald belong to typical cases, where there is a large majority of labor dispatching. This form of employment reduces the enterprise cost to a large extent. From 1990s to now, the whole society’s CPI has gone up a lot, but the prices of products offered by two companies do not change too much, and the service level does not decline. The analysis shows us that it is an important factor to use the labor dispatching to reduce labor costs.
What is more important is that this concept of different pays for same work is used to describe the pay differentials between dispatched employees and regular employees, which may be problematic. Firstly, it is not an easy task to define the equal pay for equal work. Although similar work should be paid equally, but in an enterprise, there are many factors which can decide the pay differentials, such as education background, seniority and work performance. How to identify the works between Zhang San and Li Si are “same or similar”, based on which the same pay is required, I am afraid there is no solution.
Secondly, how much the employees are paid may depend on the game of labor and capital both parties. Many people take it for granted that the reason why the employees gain low salaries is bringing down by the capital. That is not the case, how much the employees are paid is the result of market function: if the labor market is oversupplied, the salary is necessarily not high; on the contrary, the salary is rising. In recent years, there is labor shortage in the construction market, so the type of “plastering” work has the monthly salary of nearly RMB 10,000 yuan on the network. The supply of general work exceeds its demand, so the salary of general white-collar is declined.
Again, in fact, how much the employees are paid reflects the enterprise’s autonomy in the management. If the enterprises cannot pay competitive salaries, they cannot recruit qualified employees, and the enterprises cannot win out in market competition, so the enterprises will eventually assume the risk of failure caused by salary policies. On the contrary, if the enterprises impractically offer the salaries higher than the market, they will fail in the market competition because of high costs; eventually the enterprises will be bankrupt and their employees will be unemployed.
In this sense, the employees’ remuneration in the private sector seems to be unilaterally decided by the boss, but actually, it is subject to market environment, employees’ level and enterprise finance and other rigid constraints. Due to information asymmetry, of course, the most efficient company cannot work out a remuneration system to every employee’s satisfaction and having the efficiency. But the employees’ free choice can make up for the defect to a certain extent; if the enterprise cannot offer a satisfactory and competitive salary, the employees with great talents may protest by replacing the sector, etc.
In that way, does it mean that there is no phenomenon of “different pays for equal work” in a modern society at all? That is unlikely. As pointed out before, if there is sufficient competition in the market, there is no similar phenomenon between the private sectors, but once the government factor is added to the market, the phenomenon of “different pays for equal work” becomes more popular. Take an example, many people criticize that the state-owned enterprises divide the type of work into various grades and ranks. But in my opinion, this point is questioned, but it is not very serious; the phenomenon of “different pays for equal work” is mainly reflected in different social security treatments because of government interference, which may be a phenomenon ignored and most vigilant by us.
In fact, the remuneration of employees is only a part of employment costs that the enterprise should pay for, and another part is handed to the government in the form of “Four Kinds of Insurances and One Kind of Reserved Fund”. In Shanghai, for example, the enterprise needs to pay for the employees’ endowment insurance, medical insurance, unemployment insurance and work-related injury insurance (if the employee is female, the “maternity insurance” need to be added), generally accounting for more than 44% of salaries. If an employee has Shanghai household registration and still works in Shanghai, he shall get this part of security which the enterprise has paid for and he should enjoy without barriers.
However, in today’s China, due to the system of household registration, the social security cannot be portable; in other words, if you worked in Shanghai previously, later comes to Hangzhou, then the “Four Kinds of Insurances and One Kind of Reserved Fund” paid in Shanghai has nothing to do with you—— becomes silent costs. Under this system arrangement, the labor market is divided into two different groups, i.e. non-residents and residents, they are rewarded differently for equal work——in the current sense, this phenomenon of different pays for equal work does not emerge, but will inevitably occur in the future.
In my opinion, as for the Labor Contract Law, rather than take our efforts to discuss salary differential between labor dispatching and labor contract, we may as well attentively solve the salary differential caused by the system of household registration. Because the former belongs to the market competition and can be solved, the latter must be solved with the aid of the government inference. Under the background of current urbanization, the problem becomes particularly important——it is directly related to the treatment of 230 million floating population, and this quantity is much more than that of labor dispatching!
Originally published on China Times | 2013-7-3
