Employment Protection laws reduces hiring of risky applicants

From https://www.jstor.org/stable/10.1086/322836?seq=1

Jesus Fernandez-Villaverde on power in the labour market

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When a Spaniard moved to backward Minnesota

Was @MBIEgovtnz misreported on the effects of job protection laws and unions? @EricCrampton

News reports have it that the regulatory impact statement on the new employment law amendments by the new government says that:

The bill aims to strengthen collective bargaining through a range of measures, including guaranteed rest and meal breaks, reasonable union access to a workplace, and bringing back the 30-day rule where a new worker has to be given the same conditions as a collective agreement.

MBIE officials found that the cost of the proposals would mainly fall on employers, including from higher wages and compliance costs, and from a potential fall in productivity.

The MBIE papers identified the following risks associated with the bill:
• reduced employment due to changed incentives on employers to hire new workers • an increase in industrial action and protracted bargaining due to the need to conclude agreements and include pay rates in collective agreements
• an increase in partial strikes by removing an employer’s ability to deduct pay for partial striking
• lower productivity due to less flexibility (mainly from the need for guaranteed meal breaks)

These predictions must be a misreporting of an earlier draft by a junior analyst, perhaps they were not a recruit with a background in economics. The predictions of the effects of employment protection laws and union bargaining seem to be wrong for the former and seriously out of date for the latter.

Let us begin with what are the standard predictions of the effect of employment protection laws. They lower wages and have an ambiguous effect on employment because there is both less hiring and less firing. The only unambiguous effect is on the duration of unemployment because fewer vacancies are posted but once you get a job, you keep it for longer.

To give a summary of the literature that appears to be unknown to the junior analyst writing this early draft, graduate textbooks in labour economics show that a wide range of studies have found that:

1. Employment law protections make it more costly to both hire and fire workers.

2. The rigour of employment law has no great effect on the rate of unemployment. That being the case, stronger employment laws do not affect unemployment by much.

3. What is clear is that is more rigourous employment law protections increase the duration of unemployment spells. With fewer people hired, it takes longer to find a new job.

4. Stronger employment law protections also reduce the number of young people and older workers who hold a job. They are outside looking in on a privileged subsection of insiders in the workforce who have stable, long-term jobs and who change jobs infrequently.

The impact of the introduction of trial periods on employment will be ambiguous because the lack of a trial period can be undone by wage bargaining.

  • If you have to hire a worker with full legal protections against dismissal, you pay them less because the employer is taking on more of the risk if the job match goes wrong. If they work out, you promote them and pay them more.
  • If you hire a worker on a trial period, they may seek a higher wage to compensate for taking on more of the risks if the job match goes wrong and there is no requirement to work it out rather than just sack them.

The twist in the tail is whether there is a binding minimum wage. If there is a binding minimum wage,  either the legal minimum or in a collective bargaining agreement, the employer cannot reduce the wage offer to offset the hiring risk so fewer are hired. The introduction of trial periods will affect both wages and employment and employment more in industries that has low pay or often pay the minimum wage.

Trial periods are common in OECD countries. There is plenty of evidence that increased job security leads to less employee effort and more absenteeism. Some examples are:

  • Sick leave spiking straight after probation periods ended;
  • Teacher absenteeism increasing after getting tenure after 5-years; and
  • Academic productivity declining after winning tenure.

Jacob (2013) found that the ability to dismiss teachers on probation – those with less than five years’ experience – reduced teacher absences by 10% and reduced frequent absences by 25%.

Studies also show that where workers are recruited on a trial, employers have to pay higher wages. For example, teachers that are employed with less job security, or with longer trial periods are paid more than teachers that quickly secure tenure.

If employers take on more of the risk of a job match going wrong, they will pay recruits less. They can have a promotion round 6 or 12 months where pay is topped up if there is a good match. If minimum wage laws prevent starting salaries going low enough, there will be fewer job vacancies. But higher up the wage scales, the main effect of employment protection laws is to lower wages because the employer expects a wage discount to compensate for taking on more risk of an unsuccessful job match.

Consider, as an example, if there is a requirement to pay redundancy pay. Employers can easily undo this legal requirement by reducing wages. Another similarity is where employers pay completion bonuses on an offshore posting. They back-load compensation to make up for uncertainties about the willingness of the worker to last the posting. Because wages are lower for the duration of the posting, employees expect a big bonus. Also, there is self-selection, recruits are more likely to be those intending to stay for the whole posting. Both the employer and the employee split the greatest surplus from higher quality and longer lasting job matches arising from offering a completion bonus.

The analysis by the Ministry of the potential effects of unions is out of date. There are now doubts as to whether there is any union wage premium at all. The union wage premium is certainly withering away.

John DiNardo and David Lee compared business establishments from 1984 to 1999 where US unions barely won the union certification election (e. g., by one vote) with workplaces where the unions barely lost. If 50% plus 1 workers vote in favour of the union proposing to organise them, management has to bargain for a collective agreement in good faith with the certified union, if the union loses, management can ignore that union.

Most winning union certification elections resulted in the signing of a collective agreement not long after. Unions who barely win have as good a chance of securing a collective agreement as those unions that win these elections by wide margins.

Importantly, few firms subsequently bargained with a union that just lost the certification election. Employers can choose to recognise a union. Because the vote is so close, a particular workplace becoming unionised was close to a random event.

This closeness of the union certification election may disentangle unionisation from just being coincident with well-paid workplaces, more skilled workers and well-paid industries. Unions could be organising at highly profitable firms that are more likely to grow and pay higher wages independent of any collective bargaining. The unions are possibly claiming credit for wage rises that would have happened anyway.

DiNardo and Lee found only small impacts of unionisation on all outcomes they examined:

  • The estimated changes for wages of unionisation are close to zero.
  • Impacts on survival rates of the unionised business and their profitability were equally tiny.

This evidence of DiNardo and Lee suggests that in recent decades in the USA, requiring an employer to bargain with a certified union has had little impact because unions have been unsuccessful in winning significant wage gains after unionisation. These findings by DiNardo and Lee suggests that there may not be a union wage premium at all since the early 1980s, at least in the USA.

In another paper DiNardo found a substantial union wage premium before the Second World War by studying the share price effects of unionisation. One of the differences back them that there was far more violence associated with strikes.

We find that strikes had large negative effects on industry stock valuation. In addition, longer strikes, violent strikes, strikes won by the union, strikes leading to union recognition, industry-wide strikes, and strikes that led to wage increases affected industry stock prices more negatively than strikes with other characteristics.

New Zealand and U.S. unions are similar in that both are on their own in bargaining with employers for a wage rise. Options for outside arbitration do not exist in New Zealand; there are some forms of compulsory arbitration in the USA. These US result sends a message to New Zealand that unions are a bit of a relic in terms of wage bargaining. MBIE seems to have missed that literature?

In summary, job protection laws reduce wages. For the low paid, they may also reduce employment rates if minimum wage rates are binding. Unions are a dinosaur that do not matter much anymore.

 

Best defence of Employment Contracts Act is a @FairnessNZ graphic

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Source: Low Wage Economy | New Zealand Council of Trade Unions – Te Kauae Kaimahi, with extra annotations by this blogger.

Does labor market regulation really protect the interests of workers?

The 1st @PaulKrugman on @GrantRobertson1’s #futureofwork?

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Source:  Paul Krugman (1997) Unmitigated Gauls.

Mandatory layoff notice by length of job tenure in the G7, Australia, New Zealand, Ireland, Scandinavia, Greece and Spain

Mandatory notice periods for layoffs put the very survival of troubled the business at risk. By having to give long periods of notice, a firm experiencing a downturn is less able to adjust quickly and more likely simply to go out of business because it cannot meet its larger payroll.

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Source: Labor Market Regulation – Doing Business – World Bank Group.

Mandatory severance pay by length of job tenure in the G7, Australia, New Zealand, Ireland, Scandinavia, Greece and Spain

There are a wide differences across the OECD in mandatory severance pay in the event of a layoff.

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Source: Labor Market Regulation – Doing Business – World Bank Group.

Severance pay makes it more expensive to fire and therefore more expensive to hire. This means fewer job vacancies will be created but they will last longer.

The presence of mandatory severance pay  could increase or reduce the unemployment rate but unemployment durations will increase because it takes longer to find a suitable job match among the fewer available vacancies.

Mandating severance pay does not make the job match inherently more profitable. It just redistributes some of the surplus from the job match to the end when it is terminated.

Employers and jobseekers may agree to severance pay where investments in firm specific and job specific human capital for the job is profitable.

Severance pay in these circumstances gives the employer and more reasons to invest in specific human capital. The promise to pay severance pay will make the employer hesitate to lay them off. The employer will instead retain them over a slack period or redeploy them within the company rather than pay them out. This pre-commitment encourages investment in  firm specific and job specific human capital by both sides more secure, which makes the job match more profitable overall for both sides.

Of course, if it was possible to negotiate completely around severance pay mandated by law, there would be no effects on hiring, firing and unemployment durations. All it would mean is take-home pay would be less but in the event of a layoff, these employees would get that this wage reduction back as a lump sum.

The costs of teacher tenure in the USA

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