A back-of-the-envelope calculation on unfair dismissals

The comments thread below arising from my piece on unfair dismissals having gone badly meta[1], let me extract one useful point and do a quick calculation. Suppose we accept the estimate by commenter x-anon that employers typically choose to pay out three months’ wages when dismissing someone for cause (that is, for reasons other than redundancy), rather than face the possibility of unfair dismissal action.

I’m going to guess that an upper bound for the proportion of employees annually dismissed for cause in small businesses is 4 per cent (for large businesses it would be smaller and for the public sector smaller again). Then that implies that the effect of the 3-months payout policy is to raise the average wage bill by 1 per cent. Unless all dismissals for cause are justified, there will be an offsetting effect, since rational employees who regard unjustified dismissal as a possibility will want a higher wage to offset the implied reduction in expected payments. Assuming justified and unjustified dismissals are equally common (here it’s the viewpoint of the average employee that matter), and disregarding risk aversion, the net saving falls to 0.5 per cent. Given a typical labour demand elasticity of 0.5 the net increase in employment demand is about 0.25 per cent for small business (the relevant distinction is those with less than 100 employees). If, say, 40 per cent of workers are employed in firms affected by the changes, the net increase in employment is 10 000 jobs. This is a once-off increase, not an increase in the annual rate of job creation.

Of course, this is a rather simplistic calculation, not taking into account effects on employer confidence, worker morale and so forth, but it gives a feel for the order of magnitude involved. A policy initiative that might generate 10 000 new jobs is worth looking at, but it ought to be put in perspective. Telstra alone has cut many more jobs than that in the past decade, which suggests that a focus on making it easier to get rid of people is probably getting the wrong end of the stick.

fn1. Godwin’s law invoked after only 30 comments.

More bad news from London

The news that the man shot dead by police in a London station was not connected with the terror attacks is very disturbing to me. It’s too early to draw any conclusions about whether the police acted properly, but there’s no doubt that, however it happened, this was a win for the terrorists, who have claimed another innocent victim. As the name implies, the main point of terrorism is to create fear, and a situation where people are afraid of the police who are supposed to be protecting them is far worse than anything that can be created by the small risk of being in the wrong place when a bomb goes off.

Terrorism is essentially a criminal activity, and the only way to beat it in the long run is through effective police work. The terrorists of the radical left and right who operated in the 1970s and 1980s were beaten in the end, and the same will be true of the jihadists. But so far at least, the response to the London attacks seems to have more failures than successes. Let’s hope there’s better news soon.

ID Cards

I haven’t followed debate about ID cards very closely, so readers may be able to point to discussion of an issue that I regard as central. There’s a big difference between a card that must be produced on demand by police and other authorities, on pain of arrest, and one that is simply required on particular occasions (for example, boarding an airplane).

The first kind of card would be a big intrusion on our day-to-day liberties, but it might well be useful in fighting terrorism, dealing with illegal immigration and so forth. It would be the kind of thing that they used to have in dictatorships, where the loss of your “papers” was potentially catastrophic, though presumably in the Australian context, it would merely entail a night in the cells until you managed to verify your identity.

The second kind of card would not, as far as I can see, make any practical difference to anyone. The occasions on which it would be used are those that already require photo ID like a drivers license or passport. Of course, you’re not compelled to have these documents, but the same would seem to be true with the card. As long as you don’t want to catch any planes, or undertake similar activities, you can throw the card away and forget about it.

So, does anyone know which of these is proposed, or why my uninformed reasoning on the subject might be invalid.

Planning for pandemics

The news of deaths from bird flu in Indonesia is pretty scary. Although, as I’ve mentioned recently Indonesia has made a lot of progress in many respects, the handling of this threat so far seems to show the worst of both worlds: all the ill ffects of authoritian habits combined with the timidity of weak politicians. There have been a lot of coverups, and an unwillingness to tackle the necessary but unpopular task of slaughtering affected flocks of birds. Things seem to be improving now, but there’s a long way to go.

It seems very likely that, sooner or later, bird flu will make the jump that permits human-human transmission, and quite likely that a major flu pandemic will result. The world, including Australia, is very poorly prepared for this. One thing we could do to prepare is to adopt a national program encouraging annual flu vaccinations for everyone, instead of just for limited categories of vulnerable people.

The main benefit of this is not that the shots would provide immunity against a new and deadlier flu variant (though there might be some limited benefit of this kind) but that we would have the infrastructure, production facilities and so on to undertake a mass vaccination against such a variant if it arose. As it is, it seems likely that many countries will be scrambling to get access to an inadequate world supply of vaccines, but if Australia and other developed countries ramped up normal levels of production, it would be much easier to generate extra supplies for our neighbours.

I haven’t looked into it, but my guess is that, even without considering the possibility of a pandemic, the benefit-cost ratio from such a measure would be pretty high. Flu is very costly in economic terms, and I suspect that, if pain and suffering were thrown into the balance, a program of universal free vaccination would come out looking pretty good.

Update There’s lots of good background in Foreign Affairs. A piece by Michael Osterholm reprinted in the AFR Review section recently, is very good and stimulated my thinking on this topic.

China unpegs

China has announced a small revaluation of the renminbi yuan against the dollar, and a move to a managed float, relative to a basket of currencies (apparently this will be like the Australian system of the 1970s, a ‘crawling peg’, with the rate announced on a daily basis). Brad Setser has analysis and links.

I would have thought a revaluation of at least 10 per cent would have been a better idea, giving speculators at least some reason to think the next move might be down, but decisions like this are highly political.

One foot on the platform

One of the questions that’s puzzled me for a long time is: who would be silly enough to buy US 10-year bonds? Given the massive trade deficit, it’s obvious that the US dollar will have to depreciate a great deal against all its trading partners to restore balance. Despite recent gains, it’s already a long way off its 2002 peak against the euro, and the problem was already apparent then.

The standard answer is that foreign central banks are buying US bonds to prop up the currency and keep their exports going. Reports from the US Treasury International Capital System give some support to this idea – foreign central bank holdings of US government securities have risen sharply. But when you look at the maturity structures reported in Tables 9a and 9b of the Report on Foreign Portfolio Holdings of U.S. Securities (PDF file) something interesting emerges. The median maturity for all holdings of long-term US securities is four years, but for official holdings its only three years. Nearly 75 per cent of all foreign holdings of US securities (and these amounted to $1.3 trillion as of June 2004) are for maturities of less than five years. For private holdings, the median is five years, and 25 per cent are for more than ten years.

This is very puzzling. It looks as if the foreign central banks are keeping their options open. At least if the dollar undergoes an orderly decline, they will be able to unload without too much loss. But private investors are in deep.

If this was equity investment it would be comprehensible – maybe these are people who really have faith in the capacity of the dynamic US economy to generate big profits. But large holdings of long term bonds seem almost impossible to rationalise

Over to you.