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Social justice arguments against dismissal regulation


'Dismissal' by Chris JohnstonUnfair dismissal regulation is in the news again, running strongly in The Australian, the Australian Financial Review and other media outlets. The ratio of heat to light is pretty high in many of the contributions to the debate.

Removing Federal protection against unfair dismissals for small business employees was the centrepiece of the Howard Government's 2006 WorkChoices reforms. Although there were always common law remedies for unfair dismissal, and state protection, federal protection began in 1996 with Labor's Workplace Relations Act.

As well as protecting employees against dismissal on unlawful grounds (e.g. pregnancy) the legislation provided remedies for 'harsh, unjust or unreasonable' dismissal. Such dismissals were distinguished from redundancies, where the job itself disappears for economic reasons unrelated to the performance of the employees, with specified redundancy payments to employees.

The central issue in 2006 was the employment effects of dismissal regulation. The Howard Government claimed 50,000 jobs would be created by the removal of protection; research by Benoit Freyens and I (published in the journal of the Economic Society of Australia, Economic Record, in 2007, based on a three year Australian Research Council funded project) estimated the upper bound to be about 6000 jobs. Now under FairWork the central issue seems to be the effect on productivity.

It is worth briefly reviewing the economics of dismissal regulation. Regulation raises the cost of employing labour because there is a probability that any worker hired will be dismissed at some stage, and may lodge a claim, leading to administrative and legal costs and perhaps a compensation payment. Dismissal regulation also increases the bargaining power of incumbent workers, which can be exploited depending on the work environment as higher wages or reduced effort.

A subtle effect of dismissal regulation is to penalise workers who are risky for employers, such as those returning to the labour force after a break to rear children, or those with a disability, or from particular racial groups. If the employer is choosing between a safe worker, and a more risky worker then dismissal regulation will reduce the capacity for the employer to undertake post hiring sorting, and tip the employment decision towards the safe worker.

Both the effect of the regulations on incumbent wages and the subtle discrimination against risky workers induced by dismissal regulation mean that the 'social justice' arguments are not all on the side of those advocating stronger employment protection. Regulation can hurt some of the most vulnerable in the Australian labour market.

Productivity effects of dismissal regulation are less well understood. Regulation reduces the capacity of businesses to get rid of workers who reveal themselves after hiring to be less productive, reducing the average productivity of labour. Freyens is working on formal models of the effect of dismissal regulation on productivity through reduced turnover and poorer quality matches of workers to firms.

Earlier this week the Australian Financial Review reported on new research Freyens and I are undertaking which compares the operation of the Workplace Relations Act, WorkChoices and FairWork unfair dismissal regulations.

We have constructed a database of all unfair dismissal cases arbitrated by Fair Work Australia and its predecessor bodies from 2000 to late 2010 which are coded by the size of the business, industry, occupation, worker tenure and wages, reasons for the dismissal, representation of both sides, and the outcome including any compensation or value of reinstatement.

All researchers have been hampered by incomplete and opaque data releases by Fair Work Australia (they are required to report on the operation of the system under the Fair Work Act) so independent survey work is the only way of getting an accurate and comprehensive picture of the effects.

The number of unfair dismissal claims lodged under the Fair Work Act has risen to about 17,000 per year, an increase roughly in line with the Act's increased coverage of workers. If one believes regulation of dismissals is justified to protect workers then surely the extension to those previously covered by state Acts and employees of small business is a good thing. If regulation is not justified it should be abolished for all.

Our main findings are claimant success rates have increased from 33 per cent under Work Choices to 51 per cent under the Fair Work Act, mainly we think because of the extension to small business, the tighter Fair Work definition of a redundancy, and the possibility of pursuing claims under the new adverse action provisions of the Fair Work Act. Compensation payments to workers found to be unfairly dismissed have not changed much under the three regimes, averaging around 12 weeks pay.

These findings are by no means an answer to the question of whether regulation is justified. We need more empirical work on the employment effects, the productivity effects, and the distributional effects on the most vulnerable in the labour market. 

Paul OslingtonPaul Oslington is professor of Economics at Australian Catholic University, with joint appointment in the Schools of Business and Theology. 

Topic tags: Paul Oslington, Fair Work Australia, Work Choices, workplace relations



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Existing comments

Small business needs an exemption from what our accountant described as the "anti-employment legislation". Small businesses tend to work more like families or sporting teams. When one person is disaffected it affects the entire team. Having run a small business for 35 years, I have experienced the grief of "having to let some-one go" many times. No-one does this except as a last resort. But I have also experienced professional rorters. These people make their position untenable, get fired, and then claim unfair dismissal The only option a small business owner has is to offer "go away" money - there's no way they can afford the cost and disruption of defending such a case, particularly when as happened in my case, it's interstate. So yes, there does need to be a special case for small business.

ian | 19 March 2012  

Dear Prof Oslington, I, like many others I suspect, would be interesting to know if Catholic social justice extends to those who have been responsible, worked hard, looked after their money wisely and subsequently been classified as "wealthy". Does it also apply to those who invest in businesses which provide work for those wishing to earn an income? Is Ian, who commented above, owed any social justice in the Catholic vision? Or is Catholic social justice based only on the heresy that God doesn't love all his created men equally but entertains a preferential option for the poor. Are you able to comment please, Professor, and help clear up this confusion for a silly old beggar like me.

john frawley | 19 March 2012  

It is far easier to define the length of a string then “social justice”. Is it social justice to punish people by denying an old age pension just because the saved a few dollars for their old age? Is it social justice in effectively maintaining poverty traps to ensure that several generations remain on welfare? Is it social justice to pay some CEO’s Millions of Dollars for failing? Is it social justice to let politicians on yearly “study tour” scams? Is it fair that we pay our sporting “heroes” more than scientists and doctors? It seems whatever the good intentions of a few are; we are going to hurt some people. If we have good laws to protect workers, we hurt good employers. If we have good laws for employers, we reward the unscrupulous employer. Professor Oslington correctly highlighted, most issues are never black and white. Whilst making more laws may be good to control a few, most laws have unfair consequences.

Beat Odermatt | 20 March 2012  

A good article. Personally, I think "unfair dismissal" laws are themselves intrinsically and arbitrarily stacked against employers. They should not exist. There is no law that I must buy my milk only at the local milk bar, to keep the proprietor financially viable despite my wish not to, whatever that wish is. So why should there be a law that I must avail myself of the talents my employees if I prefer not to for any reason? More to the point: if an employee can walk out of a job at any time and not face "unfair resignation" laws, no matter the inconvenience to his/her employer, why doesn't the employer have the corresponding right to hire and fire at will?

In fact both employee and employer would be much better off if there were no such regulation. Employee and employer could devise their own bespoke contracts with all the desired penalties applying for arbitrary firings and walkouts. Codes of practice would evolve, customised to particular sectors, together with private courts of arbitration just like the International Court of Arbitration run by the International Chamber of Commerce, which is far cheaper, quicker and subtler in its rulings in international business disputes than state-run analogues.

HH | 20 March 2012  

There are many arguments that business people put, such as those above, against unfair dismissal laws. The outstanding point here is that they are defending the dismissal of a person earning a living, which is based on what are judged to be unfair grounds. If that sits right with you, then go ahead and exercise your due right to defend such law. There is a party in the parliament that will oblige you. But it stinks, morally, to high heaven.

Pat Mahiony | 22 March 2012  

Prof Judith Sloan's article in the Australian on Tuesday (20 March) is a propos here. Read about these appalling cases, under this legislation, crafted with the approval of militant unions, and adjudicated by a union-dominated tribunal: "A worker in a factory located in a regional town refuses to wear safety glasses, which is a requirement of work health and safety laws. He is reminded several times, but he still refuses. He is given a warning. The employer dismisses the worker lest the firm be found guilty of violating the safety laws. The tribunal finds that the worker has been unfairly dismissed, in part because it will be hard for him to find alternative work and he has a family to support. He is awarded monetary compensation." Yet another worker is found to have daubed the factory wall with swastikas, which some of the other workers understandably find offensive. But there is a culture of joshing within the workplace, according to the tribunal, and the worker is found to have been unfairly dismissed. He also is awarded monetary compensation." ... Who's winning with this disgraceful carry-on? Militant unions, irresponsible workers, and feel-good politicians. Who loses? Employers, prospective workers, the economy. Abolish the subjectivist, employer-phobist "unfair dismissal" legislation and all its deceitful pomp, now.

HH | 23 March 2012  

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