The Impact Of Ethiopian Labor Laws On Business Efficiency .
The Impact of Ethiopian LaborLaws on Business Efficiency andCompetitivenessResearch TeamGetachew Minas, MA in Economics, Northeastern University (USA)Yared Berhe, LLB in Law, Addis Ababa UniversityDecember, 2011Produced and distributed bythe Addis Ababa Chamber of Commerce andSectoral Associations with financial support fromthe Swedish Agency forInternational Development Cooperation, SidaSida
Private Sector Development Hub/Addis Ababa Chamber of Commerce and SectoralAssociations, 2011P. O. Box 2458, Mexico Square, Addis Ababa, Ethiopia Tel: 251(0) 115 504570/ 542405, Fax: 251 (0) 115 542404,Email: psdhub@addischamber.comAll Rights Reserved.No part of the publication may be produced or transmitted in any form or by any means withoutthe prior permission of the copyright holder. The only exception is for a reviewer, who mayquote short excerpts in a review.Disclaimer:- The views expressed in the study do not necessarily reflect the views of PSD Hubor Addis Ababa Chamber of Commerce and Sectoral Associations or Sida. They are solely theresponsibilities of the authors.
ContentsABBREVIATIONS AND ACRONYMS. vLIST OF TABLES. viCHAPTER I. 1INTRODUCTION. 11.1 Background. 11.2 Objectives and Expected Output. 21.3 Methodology. 2CHAPTER II. 5LABOR LAW AND LABOR MARKETS: LITERATURE REVIEW. 52.1 What is labor law?. 52.2 Labor Laws and Competitiveness. 62.3 Impact of Labor Laws on Investment and Employment. 8CHAPTER III. 9BRIEF REVIEW OF THE ETHIOPIAN LABOR LAWS. 93.1 Historical Background. 93.2 The Basic Forms of Current Labor Law. 123.3 Other Related Laws. 15CHAPTER IV. 17FINDINGS OF THE STUDY. 174.1 Coverage. 174.2 Labor Problems Faced by Enterprises. 174.3 General Observation of Employers on the Labor Proclamation. 234.4 Problems Observed in the Labor Courts and Reforms Suggested. 244.5 Effectiveness of Labor Offices. 254.6 Effectiveness of Employers’ Federation of Ethiopia. 254.7 Problems of Misinterpretation of the Labor Law. 26CHAPTER V. 29LABOR DISPUTE ADJUDICATION PRACTICES AND WEAKNESSES OFENTERPRISES. 295.1 Labor Dispute Adjudication Practices. 295.2 Weaknesses of Enterprises. 31CHAPTER VI. 33PROPOSALS FOR THE AMENDMENT OF THE LABOR PROCLAMATIONAND IMPROVEMENT OF THE LABOR COURTS. 336.1 The Labor Proclamation. 336.2 The Labor Courts. 40
CHAPTER VII. 43CONCLUSIONS AND RECOMMENDATIONS. 437.1 Conclusions. 437.2 Recommendations. 44REFERENCES. 49ANNEXES. 51
Abbreviations and AcronymsAACCSAAddis Ababa Chamber of Commerce Sectoral AssociationsCETUConfederation of Ethiopian Trade UnionsEFEEmployers’ Federation of EthiopiaFDREFederal Democratic Republic of EthiopiaFILCFirst Instance Labor CourtFSCFederal Supreme CourtHCLDHigh Court Labor DivisionILOInternational Labor OrganizationLABLabor Advisory BoardLDHCLabor Division of the High CourtLRBLabor Relations BoardMLCRMinimum Labor Conditions RegulationMNCDMinistry of National Community DevelopmentMoLSAMinistry of Labor and Social AffairsPOEPFPrivate Organization Employees Pension FundPOEPPPrivate Organization Employees’ Pension ProclamationPMACProvisional Military Administrative CouncilPSD HUBPrivate Sector Development HubREPDPRight of Employment of Persons with Disability ProclamationRSCRegional Supreme CourtSCCDSupreme Court Cassation DivisionTABTripartite Advisory BoardTDCTrade Dispute CommitteeTGETransitional Government of Ethiopia
List of TablesTable 1: Number of Enterprises by Sector and Employment. 17Table 2: Types of Labor Problems and Percent of Enterprises Affected. 18Table 3: Impact of Labor Problems and Percent of Enterprises Affected. 18Table 4: Cost of Hiring Labor. 19Table 5: Cost of Firing Labor. 19Table 6: Problems in Terminating Workers and Percent of EnterprisesAffected. 20Table 7: Reaction of Labor When Enterprises Introduce New Technology. 21Table 8: Effects of Reinstatement of Workers by Labor Court Decision. 22Table 9: Uses of Collective Agreement in Maintaining GoodLabor-Management Relations. 22Table 10: Articles of Proclamation 377/2003 Affecting Business and PercentAffected . 23Table 11: Problems Observed in the Labor Courts Affecting BusinessNegatively. 24Table 12: Opinion of Employers on Reforming Labor Courts. 24Table 13: Opinion of Employers on Effectiveness of Labor Offices. 25Table 14: Opinion of Employers on Effectiveness of Employers’ Federation ofEthiopia. 26Table 15: Sample Decisions of the Supreme Court Cassation Division (SCCD) . . 29
CHAPTER IINTRODUCTION1.1 BackgroundEthiopia is endowed with favorable climate, agrarian and mineral wealth. It hasabundant human resources, livestock, river basins, exotic wildlife, and uniqueheritages. Due to its underdeveloped agricultural and handicrafts practices aswell as the slow pace of industrialization, however, the country has not beenable to satisfy the basic needs of its people and its human resources remainunproductive.The economic liberalization measures undertaken by the Ethiopian governmentin recent years have encouraged investment that resulted in high growth ofthe economy. Several of the enterprises established have contributed to thegrowth of the various sectors of the economy. Yet the economic growth hasnot been accompanied by concomitant growth in formal employment. Themanufacturing sector, for example, has registered little incremental growth inemployment that resulted from economic growth.This disparity in growth and slow development, in particular the sluggishgrowth of employment, led to discussions and debates over the true causes ofstagnation in formal employment. There is a strong argument that Ethiopianworkers have been overprotected by strict labor laws that impede industrialgrowth and employment creation. The laws are designed to protect workersfrom discriminatory and unfair practices of employers. They intend to protectworkers against job insecurity, poor working conditions and low wages.Labor legislations stipulate minimum benefits that accrue to workers andrestrict the rights of hiring and firing, thereby raising labor costs and affectingproductivity and competitiveness. Similarly, labor market rigidities increasetenure and wages of employed workers. Both regulations and market rigiditieshave the influence to hold back investors, particularly foreign investors who,among other things, make decisions based on these factors.Theoretically, labor laws are considered exogenous factors that negativelyaffect employment and productivity. In practice, however, labor laws aretreated as partially endogenous factors influenced by national and sectoralcontexts as well as labor and capital market institutions. The political andeconomic systems followed in a country also define the content and impact oflabor laws. Such factors have to be considered when assessment of the impact1
of labor laws on business efficiency and competitiveness in a given nationalcontext is made. Thus, there is a need for an assessment of the impact of laborlaws on business operations in Ethiopia based on these and other factors.The assessment would help policy makers in designing policies that encouragebusiness efficiency and competitiveness.1.2 Objectives and Expected OutputThe objective of the study is to assess the impact of Ethiopian labor lawson business efficiency and competitiveness, and to make recommendationsthat would enhance productivity and efficiency through policy and legislativemeasures.The major expected output will be an in-depth study, which will both presentand analyze implications of the current legal and institutional framework, andsuggest specific and implementable recommendations for the government andthe private sector on improving the current institutional and legal frameworkfor the labor market.1.3 MethodologyAt the start of this exercise, the approach for the conduct of the study included,but was not necessarily limited to, the following: The consultant’s team met to ensure a collective understanding ofthe ToR and to define individual responsibilities in the conduct ofthe study; The team met with PSD Hub to ensure common understanding ofthe proposed approach and methodology as well as the approvalof the client; and Securing of all relevant documents related to the above mentionedstudy, ensuring that each member of the team has internalized thecontent of the document and filtered out the relevant information.The consultant’s team then engaged in the important activities indicatedbelow: Review of literature;2 Conduct of survey; Ensure that client’s comments and comments by the validationworkshop are accommodated as appropriate.
The methodology utilized for conducting the above activities is presentedbelow: Collect data from selected enterprises in major sectors of the economythrough:i. Questionnaires; andii. Interviewing stakeholders and gather their opinions on theprovisions of the current labor proclamations that negativelyaffect business efficiency and competitiveness; Gather views of key stakeholders on legal and institutional frameworkas well as on how to make it efficient; Retain useful inputs from earlier studies made on the subject; Review all relevant legislations; Consult with the Private Sector Development Hub.3
CHAPTER IILABOR LAW AND LABOR MARKETS:LITERATURE REVIEW2.1 What is labor law?Labor law includes all the controls that regulate, direct, and protectmanagement and labor. It is a highly personalized type of law. In addition tomeeting the terms of the law, labor law compliance involves the personal (andpersonnel) element. It requires constant study of and adjustment to all thepersonal pressures that bear on the employer-employee relationship. Laborpeace or violence must be weighed against production schedules, stakeholders’demands and expansion programs. Wage bargaining; in particular, must takeinto consideration possible operating losses, layoffs, increasing resort to laborsaving machinery and the fluctuation of the purchasing power of currency.This is true even on the legislative side. Labor law is necessarily influencedby the public interest and the public’s stake in productive industrial peace.Thus, labor law is a highly personalized law reflecting highly competitiveinterests.1 Labor law is also referred to as an employment law relating to theemployment of workers or a law that governs employment relationship.The main topics of a labor law are the contract of employment, the role ofany collective bargaining and the statutory control of minimum conditions ofwork; and these topics do, of course, subdivide still further.2 The contract ofemployment is different from other kinds of contracts in that the key issuesare the unequal distribution of bargaining power between the contractingparties, the employer and the employee. The results of such bargaining areunlikely to be in the public interest. Contract of employment may be writtenor oral, although there is now an encouragement to produce written contract.In the contract of employment the obligations of both the employer and theemployee are clearly stated. Generally, the employer’s obligations are to paythe agreed wages and to respect any other terms of the contract. However,the employer is not obliged to provide work. The employer has statutoryobligations relating to safe working conditions. The employee’s obligationsare to give faithful and honest service, to use reasonable skill in his/her work12Labor Law Course, Twenty first Edition,1972, Commerce Clearing House, Inc., publishersof Tropical Law reports,p.511J.M.Oliver, Law and Economics, An Introduction, London, George Allen and Unwin(Publishers)Ltd,1979,p.92.5
and to obey lawful orders, and not commit misconduct. An employee is,nevertheless, personally liable for damages done to property due to lack ofreasonable care in his/her work.The application of collective bargaining reduced the notion of an individualcontract. Legislations have encouraged the use of collective bargainingthrough the intermediary of government advisory, conciliation and arbitrationservices. Similarly, the idea of personal contract discouraged trade unionmovements.The labor law defines minimum conditions of work that must be observedby parties to an employment contract. Conditions of work such as hours ofwork, probation period, leave, remuneration for work performed, health andsafety of workers, and other conditions are set by the law. Both parties mayengage in collective bargaining in respect of minimum conditions of work asprescribed by law.The competitiveness and efficiency of firms is dependent on productivelabor. For labor to be productive, employers have to invest in the trainingand apprenticeship of workers. The cost incurred in improving the productivecapacity of workers is an investment that ensures competitiveness andefficiency of a firm. Workers need to be introduced to the technology withwhich they operate. Also, they have to be aware of the results of theircontribution to the enterprise. They are responsible partners in the productionprocesses of goods and services.2.2 Labor Laws and CompetitivenessIt is argued that labor markets are imperfect and, therefore, workers need tobe protected from employers who extract rent from employment relationship.Where workers are forced to work more or face termination, inefficiency andunfair practices arise. The government should, hence, intervene in the labormarket.6Government regulation of labor markets to protect workers from theiremployers takes various forms. The first is prohibition of discriminationin the labor market. This protects workers against forced labor and againstdiscrimination based on race or gender; and it also gives protection againstexploitation of child labor. The second is empowering labor unions torepresent workers in negotiating with employers. It protects labor unions thatenforce workers’ rights with the aim of curbing the power of employers overworkers. The third is government regulation of employment relationship.These interventions by government are taken as rigidities in the labor marketoperations. Excessive protection of workers is reckoned to affect performance
negatively as institutions limit businesses in making market-based decisions.It is thus argued that there is a need for labor market flexibility in whichinstitutional interventions are limited.There are theories on the need for the flexibility of labor markets. The firstexpounds the need for labor force to adjust to changes in the product marketthat requires firms to respond quickly to these changes. The changes may be insize, composition and location of the work force. The second theory is relatedto reducing labor costs and increasing productivity for competitiveness. Thethird theory emphasizes free market operations where there is no interventionby both government and trade unions. Non-intervention helps in generatingmore opportunities for both workers and employers. Labor market flexibilityimplies legislative reforms that provide greater freedom for employers andworkers to negotiate the terms of flexibility.The notion behind flexibility of labor markets is expounded by severaleconomists. Some economists argue that the free play of market forces resultsin employment of resources at the market clearing prices. This leads to bothefficiency, as almost all resources are employed, and equity, as all are rewardedaccording to their marginal contribution. Regulation of the market by thestate leads to deviations from full employment of resources. Hence, attemptsshould be made to remove as many of these imperfections as possible so as toachieve full employment of resources and optimal social welfare. In the caseof labor market, trade unions and protective labor legislations are said to bemarket distorting agents which curtail the free operations of the market forcesto ensure full employment of labor.Labor market flexibility is also essential for economic liberalization andmarket competition. Competition among firms requires that productionorganizations be guided by changing market conditions in order to promoteeconomic growth and generate employment. Labor market flexibility promotescompetitiveness a
interests.1 Labor law is also referred to as an employment law relating to the employment of workers or a law that governs employment relationship. The main topics of a labor law are the contract of employment, the role of any collective bargaining and the statutory control of minimum conditions of
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ECX Ethiopian Commodity Exchange EPAA Ethiopian Professional Association of Accountants and Auditors EPRDF Ethiopian People’s Revolutionary Democratic Front ESDG Ethiopian Share Dealing Group ESX Ethiopian Securities Exchange EUR Euro FDI Foreign Direct Investment
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