Supply Chain Innovation

China Answers Global Crisis with New Labor Market Policies

Wednesday, May 20, 2009

Many countries have adopted plans designed to help their economies recover from the global financial crisis. Unfortunately, those have mostly concentrated on saving banks and companies on the one hand, and on stimulating consumption on the other. Amazingly, there has been relatively little emphasis on the labor market policies needed to save jobs and protect wages. One wonders who is meant to do all the consuming if unemployment keeps rising and wages keep falling (at least in real terms)?

The FLA has been drawn to the impact the crisis is having at the bottom-end of the global supply chain, far from the banks and brokerage houses where the crisis first erupted. The countries that make the consumer goods that our consumption-driven economic bubble fed on have experienced a tsunami of factory closures and layoffs. In an attempt to help buyers, suppliers and worker representatives deal with that tsunami, the FLA has been on the ground in a few locations convening meetings to see how governments, employers and trade unions can work together to handle retrenchments in a socially responsible way.

Recently, the FLA was in Guanzhou, China, where we conducted a meeting that brought together a major brand-name buyer, its local suppliers and representatives from the Ministry of Commerce, Ministry of Human Resources and Social Security and the All China Federation of Trade Unions (ACFTU) for this purpose. This type of discussion has really been eroded in many countries around the globe, but in China the crisis is strengthening this collaborative process.

Protecting jobs to preserve social harmony

In China, 20 million migrant workers had no jobs to return to after the Chinese new year, creating social pressures that could not be ignored. The government and social partners have adopted a two-prong strategy to stop the hemorrhaging of jobs and loss of wages in order to maintain social stability. One prong involves measures to reduce employers’ statutory labor costs. The other involves increased vigilance by local authorities and trade unions toward companies who are not paying wages or are closing their doors without meeting their legal obligations. New regulations and policy statements from the government feature a carrot and sticks approach.

Tripartite cooperation has been very much in evidence in the Chinese response. On January 23, the Ministry of Human Resources and Social Security, the All-China Federation of Trade Unions and the China Enterprise Association issued a joint statement urging employers to avoid or reduce mass layoffs by reducing wage costs, placing workers on leave or adopting flexible working arrangements. This was followed on February 3 by a notice from the State Council that advised local governments to cut employment costs through temporary measures such as reducing social security rates or even suspending the payment of social security premiums altogether. Tax breaks are to be offered to companies in economic trouble.

Labor law enforcement and labor relations also feature prominently. The Ministry of Human Resources and Social Security has advised local governments to establish a wage arrears reporting system: if a company finds itself constrained to pay wages, then it is obliged to negotiate an agreement with its union or workers’ representatives and to file a report with the local labor and social security office.

Local authorities also have been instructed to crack-down on companies that are not paying wages, as reflected in new rules issued by the Ministry of Human Resources and Social Security in January. The measures go as far as stating that shareholders or holding companies will be held liable if the company is shuttered without meeting the company’s liabilities to workers. Foreign-owned companies may even be pursued in countries that have reciprocal agreements with China.

Handling retrenchments in a socially responsible way

At our meeting in Guanzhou, we learned more of the nuts and bolts of how China was managing the crisis. Contrary to speculation, representatives from government agencies explained that China was not permitting the highly protective provisions of the Labor Contract Law and Minimum Wage regulations to be breached. The ACFTU representatives pointed out, however, that the Minimum Wage is based on an 8-hour day and if companies put workers on short time, they only need to pay a proportional share of the minimum wage. The law allows companies to go down to 75% of the minimum wage. They also noted that workers who are on short time, forced holidays or alternative work arrangements, such as job sharing, can receive training paid for by the Government.

The company participants were surprised to learn that employers facing economic difficulties could apply to the Government for a moratorium or reduction in Social Security payments. No one could tell us, however, whether the employer would have to pay the backlog when the moratorium is lifted.

The ACFTU representatives were very engaged and stated that they were open to negotiating (or re-negotiating) collective bargaining agreements to reflect such new arrangements. The ACFTU had already negotiated a number of short-time agreements with foreign-invested companies, we were told, and was open to approaches from employers. Their only concern was that any changes to work arrangements (and hence wages) be negotiated.

As one would expect in China, the negotiation approach had been piloted in a designated area before being applied more widely. A city in Guangdong Province had been chosen to test out collective agreements with special provisions regarding wages, working hours, labor protection, women workers and work-related welfare. Agreements were negotiated at a select group of enterprises and then submitted for a number of rounds of broader consultation before being finalized. Draft agreements were then distributed to enterprises for their use. One of the provisions relates to transparency about the financial and business situation of the enterprise. Once an agreement has been concluded it is registered with the local labor office.

The FLA has agreed to continue to bring together the parties concerned at both the provincial and the national level to discuss socially responsible retrenchment. The next such meeting will be held in Jiangsu province in June. You can read more China’s National and Local Labor Market Policies on the FLA website.

Auret van Heerden