Brazil’s Labour Laws Reformed.

IB Business & IB Economics.

For the first time since 1945, as from today, November the 11th, 2017, new labour laws come into force in Brazil. The new laws have been welcomed by the business community, who feel that the laws bring Brazil’s labour market into the 21st century, but many, including  the Trade Unions and the poor, have protested against the changes.

In economic language these types of changes are often referred to as ‘ making the labour market more flexible’. In economics it is an example of a ‘ market based supply side policy’ the aim of which is to  increase economic growth and shift the long run aggregate supply curve of the economy to the right (see below).

 

Agg. Supply Curve Shifting Right.

The laws make it easier for companies to hire and fire workers, allow companies to use their workforce in more flexible ways, which will cut the cost of labour for many businesses. However, they are controversial and some feel that Brazil’s poor will be worst hit by the changes.

It is difficult to summarize all the changes to the law in such a short blog, but here are some of the highlights:-

  • It will be easier and less expensive to hire and fire workers. 
  • Meal vouchers, medical insurance, bonuses and travelling expenses will no longer be classified as ‘ employee remuneration’ as they are now.
  • Compulsory union contributions have been abolished. They will be voluntary from now on.
  • Allowing companies to split their employee’s vacation time into three separate periods. Previously holidays had to be taken over one period of 30 days per year.
  • From now on employers will not pay their workers overtime if they stay on at their work premises  because of poor weather or unsafe conditions.
  • Time spent travelling to work is no longer considered as ‘ working hours’. In the past it was.
  • Employers can now bargain directly with their workers to set pay and conditions, rather than with a Trade Union.
  • It will be easier to hire  workers on different types of contracts – part-time , remote workers (working from home) and intermittent workers.
  • Companies with 200 or more employees will have to set up a Worker Representation Committee.
  • Outsourcing will now be allowed , even for ‘core business’ functions. Previously it was only allowed for peripheral business functions like catering and security.
  • ‘ Equal pay for equal work’  rules will be more flexible. Previously workers working on different business sites, or even in the same city, could claim equal pay for equal work. Now it will be restricted to workers only working on the same site.

Sources.

https://www.latlegal.com/2017/08/brazil-labor-reform-what-you-need-to-know-about-law-no-134672017/

http://www.bbc.com/news/world-latin-america-40577868

Labor Newsletter: Mayer/Brown/Tauil/Chequer.  Labor Law (“Labor Reform”) – Federal Law No. 13.467/2017,  July 20th, 2017. 

 

Executive Pay and Donald Trump.

IB BUSINESS & MANAGEMENT AND IB ECONOMICS.

From ‘Brexit’, to the election of Donald Trump as US president, a number of recent world events have surprised and shocked many people.

Can we link anything on the IB Economics and IB Business & Management syllabuses to these profound changes in politics, society and economics? Can business and economics explain anything about these happenings?

Of course it can!

Let’s look first at executive pay (Section 2.4 of the Business syllabus, salaries and remuneration) . As Ha-Joon Chang points out in his masterly book “23 Things They Don’t Tell You About Capitalism“, the salaries (or more accurately the compensation packages) of senior US company executives has increased dramatically over the past few decades. In Chapter 14 of his book, “US Managers Are Overpriced”, Chang produces some astonishing statistics to back up his claim in the title of the chapter. He says that in the 1960’s the ratio of CEO compensation to average worker compensation used to be in the region of 30-40 to 1; in the 1990’s this ratio rose to about 100 to 1, and in the 2000’s to an astonishing 300-400 to 1 (P150).

How do economists explain such a huge rise in executive pay in US corporations? Demand and supply of course!  (Section 1 of the syllabus, Microeconomics) The reason why executive salaries have risen so high, they say, is that the demand for such skilled and able managers far exceeds their supply . Companies have to pay these managers such high salaries because,  if they don’t, they would be poached by their competitors. Moreover, these high salaries just reflect the ‘ contribution’ (read productivity) that these executives give to the companies that employ them.

Chang comprehensively debunks this argument. He points out that it is mainly neo-classical, or free market economists (Section 2 of the syllabus, Macroeconomics), who believe this. US Executives would have to be ten times more productive than equivalent personnel just a generation ago and this is extremely unlikely (P151).

Moreover, why have average US worker wages remained stagnant? Is this because their productivity has remained unchanged over the past two or three decades? Again highly unlikely, says Chang (P152).

Average hourly US wages have remained stagnant since 1972. Source: Economic Policy Institute, “Wages and Compensation Stagnating,” 2011, based on Bureau of Labor Statistics data.
Average hourly US wages have remained stagnant since 1972. Source: Economic Policy Institute, “Wages and Compensation Stagnating,” 2011, based on Bureau of Labor Statistics data.

Chang also points out that US executives, in comparison to their foreign counterparts, are excessively paid. In 2005, Swiss and German CEO’s were paid 64 and 55 percent of their US counterparts’ salaries; Swedish and Dutch CEO’s were paid 44 and 40 percent respectively, and the Japanese a measly 25 percent (P152).

So what has all this got to do with the election of Donald Trump? A lot. Trump ran on a ticket saying that he was going protect the American middle classes and the jobs of working class Americans. He fed off the justifiable anger that many middle class and poor Americans feel about the stagnation of their wages and the consequent fall in their living standards.  He used the language of ‘them and us’ –  it is us against the ‘global elite’.

Source: Congressional Budget Office, Average Federal Taxes by Income Group, “Average After-Tax Household Income,” June, 2010.
Source: Congressional Budget Office, Average Federal Taxes by Income Group, “Average After-Tax Household Income,” June, 2010.

The diagram above shows how the after-tax income of the richest one percent of the US population has increased dramatically since 1979, while the income of the poorest twenty percent (or poorest forty percent)  has hardly changed. 

Who is this ‘ global elite’? According to Chang, it is composed of super-wealthy business executives, who for years have paid themselves bigger and bigger salaries and better and better compensation packages at the expense of their own employees (and indeed of their own citizens and  own societies).

“ The power of this managerial class has been most vividly demonstrated by the aftermath of the 2008 financial crisis. When the American and the British governments  injected astronomical sums of taxpayers’ money into troubled financial institutions in the autumn of 2008, few of the managers responsible for their institution’s failure were punished. Yes, a small number of CEO’s have lost their jobs, but few of those that have remained in their jobs have taken a serious pay cut…” (P155).

Sources of the diagrams: http://keepthemiddleclassalive.com/

Limited Liability – Good or Bad for Society? (Part 2)

Business & Management.

I.B. Business syllabus links – 1.2 – Types of organisation (plc´s), 1.2 – Limited Liability, 1.4 – Stakeholders, 1.3 – Profit maximization, 1.3 – Business ethics, 1.3 – Business strategy, 1.6 – Growth & evolution

He-Joon Chang in his popular book “23 Things They Don´t Tell You About Capitalism” (see my previous post) argues that limited liability, combined with how plc´s have been managed recently, particularly in the Anglo-Saxon world of the USA and the U.K., has been bad for society.

He traces the origins of the problem back to 1981 when Jack Welsh, the then CEO of General Electric, coined the term ´maximizing shareholder value´. According to Welsh, this is what companies should do; aim to raise company share prices by increasing profits as much as possible and give as much dividend back as possible to shareholders. Managers were encouraged to do this by having part of their pay in share options. This created what Chang calls ‘an unholy alliance’ (P17) between shareholders and senior executives, both of whom benefit if the share price of their companies rise and rise.

What were the consequences of these policies?  According to Chang ” Jobs were ruthlessly cut, many workers were fired and re-hired as non-unionized labour with lower wages and fewer benefits and wage increases were surpressed …. The suppliers and their workers, were also squeezed by continued cuts in procurement prices” (P18). In other words, the other stakeholders in the business lost out.

Another strategy, moreover,  aimed at maximizing shareholder value became more and more popular – share buybacks. This is when a company uses it’s own profits to buy back it’s shares in order to artificially increase their value. According to Chang, prior to 1980 share buybacks made up just 5% of US company profit spending, by 2007 this figure had reached 90% and in 2008 just as the economic crisis was taking hold, reached 280% (P20)

These policies, moreover,  don’t even make good business sense. Less investment by companies (most of the money is being used to buy back shares or is being given to the shareholders) leads to lower long term productivity. Workers who are forced to accept wage cuts and more temporary or short term contracts, become demoralized and demotivated and consequently productivity falls.

Chang backs up his arguments with some astonishing statistics. Quoting the research of Willam Lazonik, a business economist, he says “…Had GM not spent the $20.4 billion that it did in share buybacks between 1986 and 2002 and put it in the bank (with a 2.5% after tax annual return), it would have had no problem finding the $35 billion that it needed to stave off bankruptcy in 2009” (P20). (GM, the large US automobile manufacturer, went bankrupt in 2009 and had to be bailed out at great expense using taxpayers money by the US government).

Below is a video outlining the story of GM´s bankruptcy:-

IB Business Coursework – The Research Question

IB Business & Management.

The Coursework Research Question – The Importance of ‘Focus’.

One of the first things that you will have to do when starting your business coursework is to choose a good, well focused research question (r.q.) . If you choose an inappropriate or unfocused r.q., you will be handicapped from the beginning. The word count for the HL coursework is only 2000 words (excluding the Research Question and Research Proposal) and for SL it is only 1500 ( for more general  information on the business coursework see this page of my blog). These word counts are short, and for this reason your r.q. must not be too broad. You need to focus on one specific business (or industry) in one country, and analyse one (or possibly two) of it’s problems,  strategies or decisions. See the diagram below:-

Increasingly Focused Research Question.
Increasingly Focused Research Question.

The above diagram illustrates some possible research questions, and their levels of focus, from unfocused at the top to much more focused on the bottom.

As you can see from the r.q. at the bottom, it looks at just one company, in one country, focusing on just one strategy. Indeed, rather than looking at just the ‘marketing strategy ( which potentially is a very broad strategy that includes a number of things such as ‘pricing’, ‘promotion’, ‘product’ and ‘place’, see the r.q. second from bottom ) it just focuses on just one of these – promotion.

Keep following this blog for more posts  on the IB Business coursework.

 

The Course Key Concepts – IB Business & Management

IB Business & Management.

The Key Concepts – The New Syllabus for Examinations Starting In May 2016.

 The teaching of the new syllabus should be based around three elements; the course content (the syllabus), contexts (the companies that you study throughout the course, whether they be related to your Internal Assessment, an Extended Essay, case studies that you have done in class, a company that you are familiar with) and the key concepts. See the following diagram: –

The Three Elements of the Course.
The Three Elements of the Course.

Course Key Concepts *

 Change

 A famous adage in business is that if a business does not adapt to the changing external environment, then it will die.

 Change is constantly happening, whether it be in consumer tastes, fashion, technology, culture, globalization, the external economic and social environments and the competition. Businesses are therefore having to adapt their organization, structures, aims and strategies accordingly.

One feature of the modern world is that change is accelerating.

 Culture

 The attitudes and values held by people in an organization which determine the norms, ways of thinking, courses of action and behavior of individuals in that organization.

 Businesses are located in certain countries and geographical regions, which possess their own unique cultures, attitudes and ways of doing things. However, due to globalization, these cultures are becoming increasingly interconnected and mixed up.

 Globalization

The increasing inter-connectedness of the world, economically, politically, socially, culturally and technologically.

 How businesses are increasingly selling their products, locating, conducting marketing campaigns, sourcing their finances, recruiting staff, worldwide, rather than just in their home countries.

Ethics

Relates to the decisions individuals, stakeholders and organizations make and whether they are morally right or wrong.

Innovation

In order for a business to survive, they need to innovate. This involves coming up with new ways of doing things, whether it be producing a new good or service, creating a a new production method, a new technology, a new distribution system, or a new marketing strategy. Businesses that don’t innovate cannot compete and eventually go bankrupt.

Strategy

A plan of action, usually formulated by the senior managers of a company, aimed at reaching certain goals or objectives in the future.

Your teacher should include all of these elements throughout the teaching program. These concepts are tested on Paper 2, Section C, of the final exam. More information will be provided about how  to approach this question.

*= these are my definitions / explanations of the key concepts. You may find others that are different.