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IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses

A state government reforms its labour laws so that firms with fewer than 300 workers may hire and dismiss staff without prior approval. Which outcome is the most likely from the viewpoint of a firm, and which is the main criticism?

Labour market flexibility lowers the cost and risk of adjusting staffing, so firms may hire more readily and grow. The main criticism is that workers face greater job insecurity and weaker bargaining power, which may reduce welfare and consumption.

  1. AFirms face higher hiring costs; critics say wages will fall to zero
  2. BFirms gain flexibility and may hire more readily; critics say job insecurity rises and workers may have weaker bargaining powerCorrect
  3. CFirms face a fall in labour supply; critics say productivity will rise too fast
  4. DFirms must raise the minimum wage; critics say demand will fall
  5. Firms lose the ability to use contract labour; critics say unemployment will fall

Explanation

Relaxing hire-and-fire restrictions lowers the cost and risk of adjusting the workforce, so firms may expand employment and scale up. The standard criticism is greater job insecurity and weaker worker bargaining power. The other options misstate the direction of the effects.

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