Column by Dr YRK Reddy - HRD Newsletter

THE COST OF DISRUPTIONS

The nationwide strikes in May – by pilots, bankers, truckers and some central federations - have tempered hopes that the trade unions in the country have integrated better with the economic logic of freer markets and competitiveness which can ill afford disruptions to flow of products and services. Unfortunately, the cost of disruption in flow of products and services is not confined to the “owners” of these organizations. It spreads to several other businesses, upstream and downstream, which have linkages with the struck organization. Such select disruptions also affect the indirect employees dependent on these businesses. Though there were some indications that wage increases arising from such strikes might compensate the loss of wages over a period, such a prospect does not arise for sympathetic and politically motivated strikes and bandhs which are not related to economic demands. Studies also indicate that the strikes in recent years across the world, have been less fruitful for the workers but disruptive for the rest.

It is pointed out by protagonists of unrestricted freedom to disrupt work, that statistics actually do not separate lock-outs by employers which account for more lost man days than direct action by unions; and the allegation that most strikes are because of the intransigence of employers. Counter this with the accusation by employers that, for years, the world has imposed effective restrictions on unilateral lockouts and that such lockouts are actually in the face of insidious actions by the workers and their unions! It is also a weak argument heard from the union activists that the loss due to other commissions and omissions by the government are even more – it is like saying that one would suffer chicken pox than a stroke when there is actually an option to avoid both. Moving away from the ideological score-points, the net result is the unexpected disruptions to the flow of goods and services that cause a loss to all.

In the US, there have been studies estimating the economic impact consequent to every major strike. In recent times, a strike by the airmen was analyzed to point out that every airline employee carries 60 jobs provided by businesses dependent on airlines – which adds up to about 10.5 million jobs and accounting for about 4 per cent of the American GDP. The direct cost has also been not insignificant. In the case of the manufacturing sector in Canada, there was an estimated loss of 1 per cent of GDP. In Britain, estimates of direct loss on account of strikes vary between 0.2 per cent to 0.25 per cent of the GDP. All these estimates are understatements primarily because they do not reckon the ripple effect of such disruptions.

In the case of banks, a disruption in the financial flows will actually be akin to the momentary stoppage in the flow of blood in the circulatory system – its impact affects every part silently. Similarly, a disruption in the railways will have serious impact not only on other industries but also on agriculture and perishables that contribute to a severe loss. The impact of these disruptions on suppliers and consumers may not be dramatic in the case of short strikes, as consumption can be deferred and pipeline stocks and inventory can take care of the needs. Not so, in the case of service industries because service cannot be stored or substituted easily. A loss of one day’s education or health service is severe even if one were to make up for some part of it subsequently by harder work.

Even without reckoning the ripple effect, which varies from one type of industry to the other, the GDP foregone due to the direct action, is not negligible either. For instance, a study in 1998 on industrial disruptions in the manufacturing sector estimated in the case of India, an average gross output foregone of $1236 millions; value added foregone at $221 million; wages foregone for workers at $102 million. The estimated output foregone as a percentage of manufacturing GDP was 2.01 percent. More dramatic was the finding that India figures in the top five countries in terms of the loss due to strikes and lockouts in the manufacturing sector.


Top Five

Country

Estimated Output Foregone as a Percent of Manufacturing GDP per Annum

India

2.01

Panama

1.68

Peru

1.51

Fiji

1.01

New Zealand

0.68

Bottom Five

Country

Estimated Output Foregone as a Percent of Manufacturing GDP per Annum

Malaysia

0.0050

Japan

0.0034

Egypt

0.0009

Hong Kong

0.0008

Switzerland

0.0004

(Average for 1986-95. Source: Yaga Consulting Pvt. Ltd: “Global Report on Industrial Disruptions”, 1998)

Reckoning the loss upstream and downstream, the foregone GDP must be high despite arguments of idle capacities and huge inventories that can act as buffers. In the case of services like banking and health, where the linkages with other businesses and public are far stronger, with little scope for substitutability or switching at short notices, the adverse effects can be significant.

The impact of such disruptions is primarily on employees; the organization itself; related businesses and their employees; and on the economy. For instance, the impact on the direct employees is determined by whether they receive wages for the period and whether the aims of disruptions such as higher wages and better facilities will offset the cost. Obviously, a general strike against government policies will not recover the costs though there might be possibilities of indirect benefits. If the organization adopts a ‘soft policy’, the loss can be minimal for the employees and some times recovered subsequently through overtime payments where permitted. If the organization is tough, it is not merely the day’s wages but penal wages (as permitted by our Payment of Wages Act) that will be lost for the employees. Often, successful strikes in support of wage demands may be able to offset the losses fairly quickly. During the 70’s and 80’s there were estimates of a payback period of 18 months to 3 years in the UK for workers, if they considered the lost wages as an investment - a riskier investment now, of course, compared to those heady days for the organized labour.

The organization related costs are due to stoppage, reduction or disruptions in production or rendering of services. For instance, a twelve-hour strike at NALCO in May has reportedly caused a Rs. 10 crore loss in production. While short duration strikes have lesser impact, the longer duration ones will have severe strain on cash flows, customer satisfaction and retention, apart from costs related to raw materials in the pipeline. Obviously, the demand-supply conditions eventually determine the exact cost, because, during periods of shortages in supply, the loss can be more severe than during demand recessionary periods. Disruptions also impact the stock prices as some studies in the US reveal a drop of 4.1 percent on average in the stock prices of such companies.

The related businesses are affected upstream as well as downstream and the impact is determined by the nature of such linkage, the extent of dependency of the business and the length of such disruption. For instance, whether the demand (in the case of suppliers) or stocks (in the case of consumers) will cover the disruptions and whether the product is substitutable etc. It is not just these dependent businesses that get affected but employees working in them, apart from the contract labour of the struck organization itself that get affected. For instance, a strike by 55 electricians at a component factory in the UK resulted in the layoff of 24,000 workers for long periods. In one year in the UK, about 100,000 workers had to suffer layoff due to disputes in which they had no part at all. The economic impact has not been easy to measure due to methodological problems and the lack of interest or sponsorship in many countries. Only the USA, Canada, and the UK appear to have progressed well in commissioning studies and estimating the economic impact of major industry wide or countrywide strikes.

Neither the government nor the industry in our country has estimated specifically the direct and indirect cost of major disruptions to be able to educate the public and influence the workers, trade unions and managements. It is about time that we draw lessons from other democracies, which institute studies and disseminate information on the impact of such disruptions and use them to justify State interventions.

 

July, 2003 Issue


Copyright 2000 Yaga Consulting Pvt. Ltd.