Unfair Dismissal Laws and Jobs - How Strong is the link?

Cutting edge research conducted at UNSW@ADFA covers a wide range of topical issues, such as the current political debate over employment and unfair dismissal laws. Dr Paul Oslington's Australian Research Council funded project The Impact of Hiring and Firing Costs on Wages and Unemployment has already made a significant contribution to this debate with the following article published in the Australian Financial Review on Monday. Dr Oslington is a Senior Lecturer in the School of Business . (One of the Research Office staff is a tad more concerned about having to work until the age of 75, and doesn't know how she'll last a couple more weeks……).

How then might unfair dismissal provisions affect employment? Think about a firm that uses labour to produce output, which it sells at a price which varies over time depending on market conditions. Assume for simplicity that the wage is fixed and the firm can costlessly hire and fire workers. When economic conditions and product prices are improving the value of output produced by workers will rise and the firm will hire more workers, and fire during downturns.

If we now introduce a cost of firing, like unfair dismissal provisions, the firm will only fire if the gap between the wage and the value of the worker's output (projected into the future and future payments appropriately discounted) exceeds the firing cost. Unfair dismissal provisions will reduce firing during downturns. However they will also reduce hiring during upturns as firms foresee conditions will not always remain good and they will incur firing costs in the future. (Dr Oslington has been developing the argument in terms of variations over the economic cycle, but the same applies to variation in quality of workers)

Firing costs will thus smooth employment over the economic cycle, and slow down adjustment to shocks (or in terms of worker quality, fewer bad workers will be fired and fewer good workers hired). The big question is the net effect on employment of reduced hiring and firing. It will depend on a number of factors. Higher voluntary turnover (quits and retirements) will reduce the probability of the firm incurring firing costs in the future, and blunt the negative impact of firing costs on employment during upswings. Higher rates of time discount and greater uncertainty about future economic conditions will similarly reduce the impact of firing costs during upswings. The responsiveness of demand for labour to product price changes also matters, especially if it differs between upswings and downswings for some reason (for instance if firm hoard labour with specific skills in downswings).

If wages are not fixed, then the effects are more complicated. Firing costs improve the bargaining power of employees, allowing them to force up wages (or reduce effort and productivity for a given wage). This increase in labour costs will reduce employment, with the size of this impact depending on bargaining conditions and the responsiveness of labour demand to wage changes.

As well as affecting overall employment, firing costs change the pattern of employment. Instead of taking on additional permanent employees firms will use overtime, casuals, and contractors. They will also be particularly wary about taking on high risk employees, such as those with long spells of unemployment, and perhaps those from minority groups. Unfair dismissal provisions can potentially hurt the vulnerable without jobs a great deal – it is not just the vulnerable in employment we need to think about.

So much for the mechanisms – there are many ways unfair dismissal laws can affect employment, it is not completely clear even in theory what the net impact will be. We need data to resolve the issue.

There are several approaches to measuring the impact of hiring and firing costs, including unfair dismissal provisions, on employment.

The first approach is to extract estimates of hiring and firing costs from time series data on employment (see for example Layard and Nickell). This approach has not been terribly successful because so many other things are driving employment, nor is it terribly illuminating because it yields estimates of net turnover costs rather than the components policy makers are interested in.

A second line of research (such as work by Ed Lazear at Stanford) constructs indices of the stringency of different countries firing restrictions, and sees how much of cross country variation in unemployment is explained by differences in the indices. Results vary greatly depending on how the index is constructed and the model specified.

A third approach is opinion surveys. Firms are asked whether firing costs matter to them, and whether reducing firing costs would lead them to increase hiring. The attraction of opinion surveys is that they are relatively quick and easy to conduct, but the value of the data is questionable. Economists, being the rough and tough and hard to bluff people they are, question whether firm behaviour will match their stated opinions. If firms know their answers will be used to lobby for changes in unfair dismissal provisions there is an obvious incentive to overstate the impact of firing costs on their behaviour. Data about actual costs or behaviour would be more convincing. Sometimes questions are not well specified. For instance it is not terribly surprising that firms answer that reducing firing costs will increase their rates of hiring, but this could just be an effect on turnover. The key issue is the net effect of the costs on employment.

The limitations of these approaches have pushed researchers to detailed case studies of particular firms hiring and firing costs, and collecting survey data on costs. Some data exists, particularly for France which is the only country with any kind of official statistics on hiring and firing costs, and for Italy for which we have Del Bocca and Rota 's small survey of manufacturing firms. Unfortunately the institutional arrangements are so different especially for dismissals that these studies are of limited use for Australia .

A three year project funded by the Australian Research Council is nearing completion at UNSW@ADFA in Canberra . Doctoral student Benoit Freyens and Dr Oslington are conducting a detailed survey of hiring and firing costs (conducted with the assistance of the Australian Human Resources Institute), a larger and less detailed telephone survey of small and medium enterprises, and case studies.

Costs of hiring include:

•  Advertising, interviewing and selection.

•  Administrative costs associated with new workers joining the firm.

•  Lost output while the new worker learns, plus other staff time and expenditure on firm specific training for the new worker.

Costs of firing include:

•  Administrative costs associated with the termination of the worker's contract.

•  Disruption and loss of morale for remaining workers.

•  Payments on termination to the worker.

•  Litigation which may arise from the termination.

Some of these costs (e.g. advertising, administrative costs) are not influenced by policy, but the largest components of the costs (training, unfair dismissal litigation costs) are closely tied to labour market policies. This detailed survey distinguishes between costs of retrenchment, and costs of dismissal when uncontested, settled, and cases which go to court. It also considers variation in costs by industry and occupation.

The research team are using the survey data to calibrate a dynamic labour demand model like that sketched earlier in the article, generating estimates of the impact of various components of hiring and firing costs on employment. The project is expected to be completed in late 2005, but so far there is little evidence to support some of the claims of large impacts of firing costs on employment. Some of these results were presented at an Economic Society of Australia Forum on the issue in November 2004.

Aside from the substantive research question of the effect of firing costs on employment, we must remember when assessing the impact of the Government's Fair Dismissals Bill that it is irrelevant to workers covered by State unfair dismissal laws, that the rights of existing employees are unaffected, that is does not apply to businesses with more than twenty employees, and that it will not eliminate all dismissal costs. It is difficult to see that the impact on employment will be anything other than minimal.

UNSW@ADFA Teaching Prizes – Rector's Commendations

In order to further increase the profile of teaching, and consequently its quality, UNSW@ADFA is introducing a new type of teaching prize – Rector's Commendation. Rector's Commendations will recognise excellence in one aspect of teaching, rather than the overall general excellence in teaching required for the more prestigious UNSW@ADFA Teaching Awards.

Guidelines

1. Nominations for a Rector's Commendation for teaching can be made at any time during the year; however, the TLC will only consider awards in July and November each year.
2. Nominations will be accepted in, but are not restricted to, the following categories.

   •  Excellence in Classroom Teaching

   •  Excellent Innovation in Teaching

   •  Excellent use of Technology in Teaching

3. Team nominations will be considered where the teaching initiative has involved group effort and development of team approaches.
4. Recipients of a Rector's Commendation must wait three calendar years before being eligible for another commendation .

Process

1. Potential recipients do not apply for an award; they are identified through either HOS recommendation, student or staff nomination. Nominations, identifying the category of teaching excellence, should be sent to the Presiding Member of the UNSW@ADFA Teaching and Learning Committee (A/Prof Himanshu Pota, School of Information Technology & Electrical Engineering, h.pota@adfa.edu.au, 6268 8197).
2. Based on the nominations, the TLC will invite short-listed staff to provide a brief document (2 pages) outlining their teaching methods and achievements.
3. TLC recommends to Rector the names of staff whom it believes should receive an award.
4. TLC provides feedback to unsuccessful short-listed nominees.

Commendation

The commendations will be in the form of a $500 prize and a certificate that outlines the basis of the commendation. Recipients will be awarded their prize at a UNSW@ADFA Academic Board meeting.

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WANTED

I am in the process of organising my life so that I can start caring for injured native wildlife to then, once they are fighting fit release them back into their habitat.

To do this I need to purchase Bird Aviaries, Cages with top opening lids (Cat Carry Cages), old towels, sheets etc. The list goes on.

So if anyone has Avairies and/or cages etc they would like to get rid of or sell cheaply I would be very interested.

If you do have any of the above that you would like to get rid of please contact Vicki King on 6268 8719 at work 6287 1101 at home, or email: v.king@adfa.edu.au

Event

Date

Petro Fedorczenko Lecture - Adams Hall, ADFA

1 June 2005