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