The Ability to Fire People Creates More and Better Jobs

The Ability to Fire People Creates More and Better Jobs

January 17, 2012
Originally published in Forbes

“I like being able to fire people who provide services to me.” By speaking the truth, presumptive Republican presidential candidate Mitt Romney committed the cardinal sin of politics. Look for him to be bludgeoned with this line for the next ten months.

Here’s some more truth that sticks in the craw of progressive politicians and the mainstream media. The ability to fire people is absolutely essential to a properly functioning, and therefore growing, economy. Take that ability away and the economy loses its flexibility to recover from setbacks, adapt to change, or recycle dead corporations’ resources into new entrepreneurial activity. If your goal is to create a stagnant economy packed with zombie companies, make it as hard as possible to fire people.

Let’s start with what should be obvious. Everybody likes the ability to fire people who provide them services. If a plumber overcharges you or does a lousy job, do you hire him the next time your sink backs up? If a grocer sells you rotten vegetables, do you keep shopping there? If a barber slices your ear off, will you ever get back in his chair? If a DMV clerk gives you the runaround do you … uh, wait a minute. You can’t fire her because she doesn’t work for you. She works for the government.

Romney didn’t say that he likes firing people, despite the fact that reporters and pundits continue misquoting him. He said he likes being able to fire people. No one—except maybe Donald Trump—actually enjoys firing people. It’s a miserable experience for both parties. One of the biggest reasons that I left management to become a venture capitalist is that I hated firing employees. Now I only have to fire non-performing CEOs. This is still painful but it results in fewer sleepless nights than terminating a low level employee who may have a hard time landing on his feet.

Turn off your brain and digest Romney’s quote using only your raw emotions and it’s easy to see him as a heartless beast. Use your head to understand how economies actually work—or stop working—and it’s easy to see that turning a job into a property right might feel good in the short term, but can only lead to disaster over the long term.

My firm doesn’t allow our portfolio companies to hire people in France. Why? Because inflexible French labor laws turn each full-time employee into a permanent liability. If you hire a lousy employee, market conditions change, or you need a different set of skills to grow your business, you are stuck. It’s not just us. Despite their ardent nationalism, French companies hate hiring people in France. Just look at the country’s employment statistics, as well as the number of part-time temporary workers French firms hire to duck under the labor laws.

Do you prefer having short term unemployment problems as an economy recovers from a recession or the chronic unemployment problems endemic to sclerotic economies like Spain and Greece? If the latter appeals to you, make it harder to fire people. Do you prefer short recessions followed by quick recoveries or systemic long-term stagnation? If you like the latter, make it harder to fire people.

People with no education, no skills, and no ambition may love the idea that once they land a job it is theirs for life. They’ll vote for politicians who promise to protect them from the vicissitudes of competition. But those protections take a toll. Many people who do have education, skills, and ambition will inevitably lose their edge if they go to work every day surrounded by others who are not pulling on their oars. Why be a sap and work hard if no one else is, and you know you can’t be fired? Give every employee the kind of lifetime tenure a public school teacher enjoys and it won’t be long before every business becomes as effective and well loved by their customers as our inner city schools.

Creative destruction is not just about the Darwinian competition between companies that leads to the liquidation of buggy whip manufacturers and color film processors to make room for automobiles and digital cameras. It also works to clear the workforce of obsolete skills, bad work habits, sloth, complacency, and indifference. It may sound harsh, but if you want to degrade businesses the way rent control degrades the housing stock, make it harder to fire people.

It’s no fun getting fired. I was given the boot once early in my career, with a young wife, two kids, and a mortgage to support. But it turned out to be the best thing that ever happened to me. Instead of sticking in a dead end job where I was making both myself and my boss miserable, I turned a new page in my career, opening doors I never knew existed. As odd as it may sound, I am forever grateful to the general manager who sent me on my way. Then again, it was the Reagan 80s and the economy was booming.

Perhaps you’re thinking, “There you go again talking up the power of a growing economy.” The funny thing is growth sure does solve a lot of problems. There’s nothing funny about regulations that snuff it out.