Workplace relations reform: examining the economic data

Many working people, regrettably, equate labour market flexibility with job insecurity. Despite that perception, flexible labour market policies appear to promote job creation, not destroy it. An increased capacity of management to discharge workers without excessive cost, for example, apparently increases companies’ willingness to hire without fear of unremediable mistakes.

Economic theory generally suggests that employment protection legislation tends to depress both hiring and firing. This prediction is generally supported by empirical evidence. That is, employment protection legislation does protect existing jobs, at least to some extent, while also adversely affecting new job creation.

It may well be that employment protection legislation inhibits the ability of businesses, and the economy more broadly, to respond to technological change (which may have to be accommodated through worker turnover): although it could also be argued that protected workers are less resistant to technological change and more willing to re-train.

The finding that employment protection laws reduce both hiring and firing also means that any effect on unemployment depends on which of these is affected more.

The evidence is not clear. However, studies do provide some support for the notion that employment protection legislation may adversely affect the prospects of young people and women - who at any given time are more likely to be seeking to enter or re-enter the workforce - while positively impacting the stability of employment of prime-age men.

It’s worth noting that the Government proposes to retain the existing unfair dismissals laws for employers with more than 100 employees (who account for about 38 per cent of employees), whilst abolishing them for employers with fewer than this number - even though these laws impose costs on large businesses as well as small ones.

If the Government accepts there is a case for employees to be protected against unfair dismissal - which it presumably does since it is not abolishing the law for all employees - then it is a little strange that the employees who are to remain protected from unfair dismissal are actually those least likely to be unfairly or capriciously dismissed. That’s because large corporations usually have HR departments whose functions include ensuring that their managers adhere to “procedural fairness” when dismissing staff, and because large corporations are generally more conscious of the reputational risk involved in unfair dismissals cases.

That being so, a more creative response on the part of the Labor Party to this element of the Government’s proposed reforms might have been to replace the word “under” in the relevant section of the legislation with the word “over”: so that those working for employers with fewer than 100 employees continued to be protected against something that was more likely to happen to them, while larger employers were exempted from those provisions.

New procedures for setting the minimum wage

Australia’s minimum wage, ($484.40 per week or $12.75 per hour for a 38-hour week) is high, relative to median wages, by international standards. According to the OECD, Australia’s minimum wage (in 2002) was equivalent to 58 per cent of the median earnings of full-time adult employees, higher than any others except France. Britain’s Low Pay Commission reported that Australia’s 2004 minimum wage was 58.8 per cent of median full-time adult earnings, highest of the 14 OECD economies covered.

As the Melbourne Institute’s Mark Wooden points out, “for most economists, minimum wage to median earnings ratios of close to 60 per cent are indicative of a system that prices many of the unemployed out of the labour market”.

David Card and Andrew Krueger, authors of the now well-known study ten years ago which suggested that increases in the minimum wage did not have the adverse impact on employment traditionally ascribed to them, acknowledge that their findings only applied to levels of the minimum wage that existed in the US (a little over 30 per cent of median full-time adult earnings) and that, beyond some point, minimum wage increases must harm employment.

The UK Low Pay Commission believes that the British minimum wage - first introduced at £3.60 per hour (for persons aged 22 and over) in April 1999, and since increased by 35 per cent to £4.85 per hour, equivalent to 43 per cent of median full-time adult earnings - “does not seem to have had any significant negative impact on the labour market any significant negative impact on the labour market”, although two research projects which they commissioned found “small negative employment effects in those sectors and among those most affected by the minium wage”. The commission also found that the minimum wage has “had a major beneficial impact on the aggregate earnings of women” without “harming women’s job prospects”.