The Laws of Economics are always in Action

Last year the government of India passed a bill extending maternity benefit leave from 12 weeks to 26 weeks for the pregnant women with lot of fan-fare. The objective of this law was to protect the employment of women during the time of pregnancy and entitles them to full paid absence from work to take care of their child. The labor minister Bandaru Dattatreya, who pushed this bill in parliament, said, This is my humble gift to women, a day after the world celebrated the International Women’s Day.

At that time I said that this bill, a humble gift (sic), will result into guaranteed unemployment for women. Now a report from Times of India (TeamLease) confirms this outcome. The report says,

Ten sectors of the Indian workforce may lose 1-1.8 million women in FY19 as a fallout of the Maternity Benefit (Amendment) Bill passed last year, according to a Times of India report quoting a TeamLease study.

The ToI report says that small businesses have been a bit reluctant to hire women due to the costs that the bill enforces on a company in case a female worker gets pregnant.

The reason for such an adverse outcome of such welfare policy lies in the way in which the market functions. And behind markets’ functioning there lies concrete and exact laws of economic science.

I am sure everyone knows that any business can survive in the market only if it is making profit. Profit and loss is what guides entrepreneurs’ action of in which sector of the economy to enter and exit. Business’s profit is calculated by subtracting its total cost of production from its total revenue. If the total cost is higher than total revenue then business will make loss and vice versa. As the report above says, for many businesses this maternity benefit (amendment) bill means higher cost of production without any addition into their revenue. Suppose firm A is hiring 10 women and they are paying them a salary of 100 rupees. Their cost of production thus is 1000 rupees. Suppose these 10 women are generating revenue worth 1500 rupees. This means firm A is making 500 rupees profit. Now after the introduction of this bill, suppose 5 women go on maternity leave which is fully paid. In this scenario now the firm’s cost of production is still 1000 rupees, but now their revenue has gone down because 5 women are not working and on leave. Those remaining 5 women work force is only generating revenue worth 750 rupees, which means a loss of 250 rupees for the firm. No firm will take losses and so they will either fire those 5 women or stop hiring new ones to stop getting into this kind of loss making situation in future.

Politicians love passing such welfare bills, because they help them win votes and power, and show to people how the government is their friend and protector. But an understanding of the way in which the economy functions tells us that government, instead of being a friend and protector, is actually an enemy. They harm rather than do any good. People need to understand that such legislation can never improve their condition. It is better they stop relying on politicians and embrace market and its competition.

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3 thoughts on “The Laws of Economics are always in Action

  1. PI says:

    Goverment does not want to sell IDBI to two private players because it feels it’s INTRINSIC VALUE is higher than that offered by private players. The concept of intrinsic value is demolished by Mieses, to who, value is subjective.

    Govt thinks there are vested interest in goverment thinking being opposed. Only thing missing is “foreign” hand, all key phrases of Marxist thinkers (intrinsic value, vested interests, foreign hand)

    Again it withdrew Air India from divestment because of perhaps reserve price.

    Would the minster buy Air India with his PERSONAL money, with it’s huge debt, and risk being hunted and put in jail ? Why does he not question, WOULD I PERSONALLY HAVE BOUGHT IT?

    Why does he want to use other people’s money like tax payers or that of LIC ( It wants to buy IDBI bank with it’s huge debt).

    Goverment can save one existing job only be destroying tens of jobs in private sector.

    Can the minister reconcile the Lie of GDP growth and Engineering education losing flavour?

    GPP = GDP minus Goverment depradations

    PPR = GPP minus Goverment depradation.

    I am certain economy is contracting in PPR terms.

    On Why BJP’s honesty is worse than Congress corruption.

    Strictly on economy terms, black money economy was getting bigger than white money Economy.

    With demonitization, effect of goverment spending, is more devastating. There is no black money to absorb the shock.

  2. PI says:

    It does not give me great joy to dissect. But what must be done must be done.

    Now women who don’t get jobs because of extended maternity laws, but millions of women who need the job will be forced to take up illegal jobs ( out of record of goverment scrutiny). This may push them to danger of violence prevalent in criminal environment. If police intervenes they lose the job.

    At least goverment should allow free gun laws for self defence.

  3. Pingback: The Maternity Benefit Boondoggle – Mises India

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