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Social justice arguments against dismissal regulation

  • 19 March 2012

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