17

# **(fv) Employment effects**

42. Stale enterprises tend to be overstaffed, sometimes severely so as governments used them for purposes of employment generation and maintenance. Some examples:<sup>inSriLanka,</sup> average redundancy in eight of the largest fims (electricity, railways, shipping,<sup>sugar,cement</sup> and petroleum) was 53 per cent (Salih, 2000); state-owned Air Afrique has 4,200 employees and eight aircraft, while industry leader, and privately owned, Ryan Air maintains<sup>a</sup> staff<sup>of 1,400 for</sup> 21 planes; prior to privatization, Argentine railways employed over 90,000 people and had a wage bill equivalent to 160% of the firmn's total revenues. Many similar examples could be given. These levels of overstaffing contributed to the financial weakness of SOEs. Excess labor is one of t1e first cost areas addressed either by reforming governments or new private<sup>owners.</sup> The saliency of the issue has led to widespread concern that privatization<sup>inevitablyleadsto</sup> unemployment and loss of benefits; this in tum has sparked opposition to privatization<sup>from</sup> trade unions, workers, and academics.

43. The view that privatization always leads to layoffs is unfounded. True, highly protected and deeply politicized enterprises have seen significant declines in net employment, usually before but also after privatization: 80, 72, and 50 percent respectively in Argentina's railways, petroleum, and electricity enterprises; 82 percent in Brazil railroads; 42 percent in Manila<sup>water;</sup> 50 percent in a study of Mexican firms. Moreover, while D'Souza and Megginson's 2000 study of 78 privatized firms in 25 countries found insignificant employment declines for the<sup>groupasa</sup> whole, there were significant reductions in a sub-group of non-competitive firms. The<sup>bulkof</sup> these reductions occurred largely in the run up to privatization as governments prepared enterprises for sale; in a few cases they were accompanied by further reductions<sup>bythe new</sup> owners/concessionaires. But much of this shedding was due to the need for<sup>restructuring</sup> irrespective of privatization and to general economic conditions rather than privatization per se (Box 3).

# Box 3: **Privatization** and Employment in C6te d'Ivoire

Jones, Jamal and Gogkur (1998), in their study of COte d'lvoire, analyzed the effects of privatization<sup>on labor.</sup> They found that the privatized sector as a whole indeed shed labor prior to privatization. But it shed less than the economy as a whole, suggesting that layoffs were a response to weak economic conditions rather than to divestiture itself. In fact, they argue that privatization may have reduced labor shedding,<sup>possiblyto mininize</sup> labor opposition to privatization. Moreover, the privatized sector maintained Ivoran employment unchanged through 1994, and in this regard did sipificantly better than enterprises as a whole. In privatized firms, total employment increased by an average of 3.9 percent per year after pTivatization while falling by 1.9 percent per year before privatization, which meant that tue firms added an average of 741 jobs per year after privatization while shedding 456 jobs per year prior to it. The authors believe that it would have risen still more without privatization, because, as profitabilty returned after the recession, the public sector would have reveited to<sup>its</sup> previous habit of over-employment. Looking at employee compensation, real wages per worker and total employee compensation per worker grew at an annual rate of 8.5 percent and 6.8 percent respectively after privatizadon while falling i-n the years before; and there was wage convergence between<sup>the lowestpaidand</sup> highest paid workers.

Source. Jonus, Jwnal, and Gogur, 1998.