If there’s one area where the Howard government’s Senate majority (or near-majority) seems likely to make a big difference, it’s in relation to our working lives. While the government’s commitment to free-market policies has waxed and waned, it has been absolutely consistent in representing the views of employers, whether they have demanded labour market deregulation (as in the stripping back of awards) or tighter regulation (as in anti-strike laws). The government and its supporters would, of course, claim that what is good for employers is good for employees, and there is clearly a good deal of truth in this claim. Still, there are plenty of occasions when employers and employees come into conflict (in such cases, it is more natural to refer to workers and bosses). I plan a series of posts looking at aspects of the government’s reform program, and the state of employment relationships more generally.
Of all the items on its agenda, the removal of unfair dismissal laws, at least for small businesses, is probably closest to the government’s heart. A contested dismissal is something like a contested divorce in the feelings it arouses on both sides, and the government hears all the time from the employer side of the dispute.
In economic terms, the problem starts with the fact that an employment contract has a lot of implicit or hard-to-verify terms. The worker promises to turn up on time, work diligently, be competent, and not cause trouble and dissension in the workplace. The boss promises to act fairly, not to harass or bully the workers and so on. Once both parties have committed to the relationship, they each have the opportunity to cheat on these commitments. How this works out depends on the institutional rules, the state of the labour market and so on. Whatever happens there are going to plenty of people who perceive the outcome as unfair, and plenty of cases where this perception is accurate.
The aim of unfair dismissal laws is to set up a clear procedure that employers must follow to dismiss underperforming employees. This is widely seen as acceptable for large employers with organised HR departments to keep track of such things. But for small businesses, it’s a burdensome process. On the other hand, anyone who’s dealt with small business employers knows that they vary a lot. The good ones are much better than big corporations, the bad ones a lot worse.
What about the empirical evidence? As with many things in economics, the literature on unfair dismissals starts out with a big publication finding clear-cut results, only to descend into a morass of agnosticism. A paper by Lazear in 1990 found strong negative correlations between the strength of employment protection laws, proxied by severance pay, and desirable labour market outcomes such as employment and participation rates, hours worked and so on. Jason Soon cited it in his paper on unfair dismissals. But Lazear’s results have not stood the test of time. Here’s the abstract of a recent paper What have we Learned About the Employment Effects of Severance Pay? Further Iterations of Lazear et al.
In this study we examine the contribution of severance pay to employment and unemployment development using data on industrialized OECD countries. Our starting point is Lazear’s (1990) empirical dictum that severance payment requirements adversely impact the labor market. We extend his sample period and add to his parsimonious specification a variety of fixed and time-varying labor market institutions. While the positive effect of severance pay on unemployment garners some support, there is no real indication of adverse effects for (the three) other employment outcomes identified here. Moreover, with the possible exception of collective bargaining coordination, the role of institutions is also more muted than suggested in the literature
This ILO study gets similarly unclear results. Generally speaking, employment protection laws lower the variance of employment and unemployment but have no clear effect on the average levels.
In political terms, it’s worth considering the relationship between unfair dismissals and unions. Legal protections for workers are, to some extent a substitute for unions. But one of the functions of unions is to help their members take advantage of legally available protections such as unfair dismissal laws. On the whole, I think the implementation of the government’s reform agenda is likely to be good for unions, by sharpening the perception that workers can’t rely on the goodwill of bosses.