Sun, Jun 20, 2004 - Page 8 News List

Pensions only reduceemployees' real income

By Chang Ming-chung 張明宗

On June 11, the Legislative Yuan passed the Laborers' Pension Law During the legislative process, the age requirement and fund allocation to the laborer's pension reserve have led to fierce conflicts. But the pension issue is rather insignificant. The Labor Standards Law promulgated in 1984 took us on an aimless journey leading to nonsensical conflicts.

The Labor Standards Law requires that employers give employees pensions because this is thought to be beneficial for workers. From the perspective of equilibrium analysis, however, this is but an illusion.

In layman's terms, equilibrium analysis tells us that we have to compare others to ourselves when making decisions; since a decision maker knows that he has his own best interests in mind, and since he believes himself to be smart, he should also understand that his opponents have the same mindset. When he plans to take action, he must thus suppose that his opponent will try to restrain him, and also that this opponent is a master strategist.

In other words, equilibrium analysis tells us that any decision maker must take a long-term approach when making decisions. He or she cannot only take a short-term approach that is so short-term that no one else has time to react to the decision.

If we look at the issue from a long-term perspective, we find that policies caring for workers at most are neutral policies. In 1984, the government began requiring that companies pay pensions. When the program was first introduced, workers who could retire immediately may have come out winners, but in the long run, employers have to lower regular wages to suitable levels to restore the original situation. Once the employer has responded in this way, the pension workers get will be deducted from their regular wages, and so they will not in the end gain anything.

If we believe that a progressive pension system will improve employee benefits, we are playing employers for fools. Treating your opponent as a fool is a big no-no in decision-making.

In more detail, equilibrium analysis tells us that if competition on the labor market is free, workers' wages will be exactly equal to marginal production values (ie, the marginal production volume of labor multiplied by the product price). Overall worker income will be no more and no less. Increasing one welfare item will cause another item to decrease.

If we want to raise worker income, we need only to concentrate on fundamentals by improving productivity. In addition to workers improving their own productivity, we can also increase investments. For example, a worker with the appropriate machinery will of course be more productive than if he had to rely only on the use of his own hands. There are no shortcuts to increas-ing labor income. It can only be done in one of three ways: by workers improving their own productivity; by increasing public investment; and by encouraging private investment. What we should be considering is whether these three goals can be achieved.

Many policies to protect workers in fact amount to killing the hen to get the egg, because they scare off private investment.

When the legislature turned the Labor Standards Law pension system into a system with individual pension accounts that follow the worker to make employers more willing to hire middle-aged and older workers, they also to some degree took away the seeds of evil planted by the "virtuous policies" of that law.

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