Paying wages on time is good ethics – and also good business

The Ministry of Human Resources and Emiratisation on October 3 issued the wage protection decree which ensures that employees receive their wages in full and on time. Jaime Puebla / The National

The UAE implemented a decree on October 3 that helps workers receive their wages on time by specifying punishments for tardy employers. This is a welcome move for a country where more than 90 per cent of the labour force is foreign, although maybe not for the reasons that you would think.

Non-specialists typically perceive issues relating to wages through an ethical lens. In fact, the press release accompanying the decree draws attention to the importance of protecting labour rights. If asked to express their feelings towards unpaid wages, most people would use terms such as “unfair”.

Religion also plays a role in societal attitudes – the Prophet Mohammed instructed employers to “give the worker his wages before his sweat dries”.

As it happens, paying wages on time is not just good ethics – it is also good business. Unpaid wages are an example of breach of contract, which is an undesirable phenomenon from an economics perspective, for reasons unrelated to social justice.

Contracts are primarily means of facilitating interactions where all parties benefit. Most economic interactions require some sort of asynchronous behaviour by the involved parties, which creates an opportunity for exploitation.

For example, when I purchase an Arabic coffee in a UAE mall, a contract is unnecessary because the parties involved receive the benefit that they expect from the interaction immediately and terminally. In contrast, when I purchase a luxury Dubai apartment, the benefits accrue over years, well after I have paid and bid farewell to the seller. Therefore, I need a contract to protect me from the possibility of being sold a unit with hidden damage.

If contracts are unavailable, then many economic interactions would never occur because they would be vetoed by the side that fears exploitation. Society would end up foregoing sophisticated interactions such as producing cars and college education, barely getting us beyond the Stone Age. Would you buy that Dubai apartment without a contract? In the US-based Heritage Foundation’s property rights index (a proxy for contract reliability), the lowest scores are for the world’s poorest countries, such as Zimbabwe and North Korea, while the higher scores are reserved for the richer ones, including the UAE and the GCC.

Naturally, for contracts to serve their purpose, they need to be enforced, which is primarily the responsibility of courts. However, courts are expensive and slow, which is one of the reasons why government regulations can be helpful to the economy – they act as a superfast conflict-resolution mechanism, and this is especially useful in cases where fault can be easily assigned, such as a late wage, but where even the UAE’s efficient courts would still be cumbersome.

If Emirati employers opportunistically exploited being able to delay paying wages, then the economy would underperform massively, because fewer workers would wish to work for UAE employers. This would be especially damaging to large-scale, long-term projects, such as building infrastructure, operating factories or managing investments.

The efficiency of regulations compared to a dawdling court, however, comes at the cost of flexibility. In the complex world of the 21st century, contracts cannot account for all contingencies, ensuring an important role for a judge’s discretion in resolving disputes. The coarseness of the regulations can render them counter-productive, which is one reason why governments in and outside the GCC should exercise regulatory restraint.

Adam Smith, the father of modern economics, once remarked: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Contract enforcement is the essence of capitalism, and the reason the system works so well is that much of the time good business equals good ethics, and vice versa. The UAE’s move to ensure timely payments is the latest example, and the Government should embrace and emphasise the economic benefits as much as the purported ethical ones.

Omar Al Ubaydli is the programme director for international and geopolitical studies at the Bahrain Centre for Strategic, International and Energy Studies, and an affiliated associate professor of economics at George Mason University in the US.

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