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


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of the effects of employment protection laws and union bargaining seem to be wrong for the former and seriously out of date for the latter.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


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?


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.


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.


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

@WJRosenbergCTU How the unions argued for the Employment Contracts Act when arguing strongly against it

The Council of Trade Unions scored something of an own goal in the 2014 election campaign when it was denouncing the Employment Contracts Act 1991 as the reason for wages growth have not kept up with GDP per capita growth since its passage in 1991. Its evidence in chief against the deregulation of the New Zealand labour market is in the snapshot below showing their graph of real GDP per capita and average real wages from 1965 to 2014.


Source: Low Wage Economy | New Zealand Council of Trade Unions – Te Kauae Kaimahi.

The chart selected by the Council of Trade Unions shows several distinct trends in wages growth and real GDP growth  per capita in New Zealand. None of these trends nor breaks in trends support the hypothesis that the days prior to the Employment Contracts Act 1991 were the good old days where workers shared generally in gains from economic growth.

From about 1970 to 1975 in the snapshot below of the Council of Trade Unions chart there was rapid real wages growth, well in excess of real growth in per capita GDP. This wages breakout was followed by some ups and downs but essentially wages in 1995 were no different from what they were in 1975. Real wages were about $24 per hour in real terms in New Zealand for about 20 years – from 1975 to 1995.


These are the good old days in the eyes of the Council of Trade Unions. No real wages growth for 20 years. There was no real GDP per capita growth from 1975 until 1979 nor in the five years leading up to the passage of the Employment Contracts Act 1991 in the chart selected by the Council of Trade Unions in the snapshot above.

The period leading up to 1975  in the preceding wages breakout was the zenith of union membership with nearly 70% of all workers belonging to a union – see figure 1. What followed from 1975 was a long declining in trade union membership that did not end until just after the Employment Contracts Act in 1991 – see figure 1.

Figure 1: Trade union densities, New Zealand, Australia, United Kingdom and United States, 1970–2013


Source:  OECD StatExtract.

Whatever happened to union power in New Zealand happened before the passage of the Employment Contracts Act 1991 and with it the deregulation of the New Zealand labour market. 20 years of no real wages growth and economic stagnation may explain part of the decline of unions in New Zealand.

Real GDP per capita growth was pretty stagnant after 1975 to 1994 in the chart of data selected by the  Council of Trade Unions, which is why I have previously referred to 1974 to 1992 as New Zealand’s Lost Decades – see figures 2 and 3.

Figure 2: Real GDP per New Zealander and Australian aged 15-64, converted to 2013 price level with updated 2005 EKS purchasing power parities, 1956-2013, $US

Source: Computed from OECD Stat Extract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics

Figure 2 shows that New Zealand lost two decades of productivity growth between 1974 and 1992 after level pegging with Australia for the preceding two decades.

These lost decades of growth are the unions’ good old days but workers cannot share in the general gains of economic growth when there isn’t any economic growth as the chart selected by the Council of Trade Unions and figure 2 both show.

New Zealand returned to trend growth  in real GDP per working age New Zealander between 1992 and 2007, which is straight after the passage of the Employment Contracts Act 1991 – see figure 2. Coincidence?

Figure 3: Real GDP per New Zealander and Australian aged 15-64, converted to 2013 price level with updated 2005 EKS purchasing power parities, 1.9 per cent detrended, base 100 = 1974, 1956-2013, $US

Source: Computed from OECD Stat Extract and The Conference Board, Total Database, January 2014, http://www.conference-board.org/economics

In Figure 3, a flat line equates to a 1.9% annual growth rate in real GDP per working age person; a falling line is a below trend growth rate; a rising line is an above 1.9% growth rate of real GDP per working age person. The trend growth rate of 1.9% per working age person is the 20th century trend growth rate that Edward Prescott currently estimates for the global industrial leader, which is the United States of America.

Figure 3 shows that there was a 34% drop against trend growth in real GDP per working age New Zealander between 1974 and 1992; a return to trend growth between 1992 and 2007; and a recession to 2010. this 34% drop against trend productivity growth is looked upon by the Council of Trade Unions as some sort of good old days.

A long period of no labour productivity growth and little real GDP per capita growth are pretty good reasons to rethink New Zealand’s economic policies at a fundamental level, which is exactly what happened after 1984 with the election of a Labour Government.

The unions have conveniently provided another explanation for the Lost Decades of growth in New Zealand from 1974 to 1992. That is the rapid growth of real wages ahead of real GDP per capita in the seven years before growth stalled in New Zealand in 1974 in the snapshot above. This real wages breakout was followed by two decades of lost growth.

Most ironically of all, steady growth in real wages in New Zealand did not return until after the passage of the Employment Contracts Act in 1991! After nearly 20 years of no real wages growth, real wages growth returned at long last in 1995.

After staying at about $24 per hour for 20 years from 1975 in the good old days of union power and collective bargaining, average wages in New Zealand have increased from $24 an hour to about $28 per hour by 2014 in one of the most deregulated labour markets in the world.

The Council of Trade Unions regards the return of real wages growth after a 20 year hiatus as an unwelcome development or something to complain about.

Paid sick day entitlements across the OECD membership

Who gains and who loses from employment protection laws over the business cycle?

banerji chart 2

banerji chart 1


France, here the New Zealand labour market comes – part 2! How the Employment Court is re-regulating

As discussed yesterday, if the Employment Court had its way, New Zealand case law under the Employment Relations Act regarding redundancies and layoffs would be as job destroying as those in France.

The Employment Court’s war against jobs goes back more than 20 years. To 1991 and G N Hale & Son Ltd v Wellington etc Caretakers etc IUW where the Court held that a redundancy to be justifiable under law it must be ‘unavoidable’, as in redundancies could only arise where the employer’s capacity for business survival was threatened.

The Court of Appeal slapped that down and affirm the right of the employer to manage his business in no uncertain terms:

…this Court must now make it clear that an employer is entitled to make his business more efficient, as for example by automation, abandonment of unprofitable activities, re-organisation or other cost-saving steps, no matter whether or not the business would otherwise go to the wall…

The personal grievance provisions … should not be treated as derogating from the rights of employers to make management decisions genuinely on such grounds. Nor could it be right for the Labour Court to substitute its own opinion as to the wisdom or the expediency of the employer’s decision.

When a dismissal is based on redundancy, it is the good faith of that basis and the fairness of the procedure followed that may fall to be examined on a complaint of unjustifiable dismissal

… the Court and the grievance committees cannot properly be concerned with an examination of the employer’s accounts except in so far as it bears on the true reason for dismissal.

The Employment Court could only inquire as to the genuineness of the employer’s decision and the procedures adopted. The Court could not substitute their views on management decisions. No second-guessing.

In Brake v Grace Team Accounting Ltd, the Employment Court found its way back into second-guessing employer’s decisions about how to manage their business. The figures used by the employer to decide that a redundancy was required were in error. The employer miscalculated.

The Employment Court had previously held in Rittson-Thomas T/A Totara Hills Farm v Hamish Davidson that the statutory test of what a fair and reasonable employer could have done in all the circumstances applies to the substantive reasoning for redundancies. Some enquiry into the employer’s substantive decision is required to establish that a hypothetical fair and reasonable employer could also make the same decision in all of the circumstances.

Subsequently in Brake v Grace Team Accounting Ltd, the Employment Court found that the actions by the employer were “not what a fair and reasonable employer would have done in all the circumstances” and “failed to discharge the burden of showing that the plaintiff’s dismissal for redundancy was justified”.

The Court found that the redundancy was “a genuine, but mistaken, dismissal”, but it still found that the dismissal was substantively unjustified. That is a major new development. Mistaken dismissals that are genuine are unlawful and grounds for compensation under the employment law.

The case was appealed where the issues were whether the correct test had been applied. The Court of Appeal, in a sad day for employers, job creation and the unemployed, found that the Employment Court was within its rights to do what it did and applied the statutory tests correctly:

 GTA acted precipitously and did not exercise proper care in its evaluation of its business situation and it made its decision about Ms Brake’s redundancy on a false premise.

So it never turned its mind to what its proper business needs were but rather proceeded to evaluate its options based on incorrect information. We can see no error in the finding by the Employment Court that a fair and reasonable employer would not do this.

The test is now that fair and reasonable employers in New Zealand do not make mistakes. A much greater burden is now laid upon employers to show that not only that redundancies are justified, but they have made careful calculations and no mistakes.

No more seat of your pants entrepreneurship in New Zealand. No more entrepreneurial hunches – the essence of entrepreneurship is acting on hunches and other judgements that are incapable of being articulated to others and about which there is mighty disagreement in many cases. As Lavoie (1991) states:

…most acts of entrepreneurship are not like an isolated individual finding things on beaches; they require efforts of the creative imagination, skillful judgments of future costs and revenue possibilities, and an ability to read the significance of complex social situations.

The essence of entrepreneurship is your hunches are better than the next guy’s and you survive in competition by backing that hunch often to the consternation of the crowd. As Mises explains:

[Economics] also calls entrepreneurs those who are especially eager to profit from adjusting production to the expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement…

The entrepreneurial idea that carries on and brings profits is precisely that idea which did not occur to the majority… The prize goes only to those dissenters who do not let themselves be misled by the errors accepted by the multitude

In many cases, those entrepreneurial hunches are sorted, sifted and selected on the basis of trial and error in the marketplace. Central to Hayek’s conception of the meaning of competition is it is a process of trial and error with many errors:

Although the result would, of course, within fairly wide margins be indeterminate, the market would still bring about a set of prices at which each commodity sold just cheap enough to outbid its potential close substitutes — and this in itself is no small thing when we consider the insurmountable difficulties of discovering even such a system of prices by any other method except that of trial and error in the market, with the individual participants gradually learning the relevant circumstances.

Remember Hayek’s conception of competition as a discovery procedure where prices and production emerge through the clash of entrepreneurial judgements and competitive rivalry:

…competition is important only because and insofar as its outcomes are unpredictable and on the whole different from those that anyone would have been able to consciously strive for; and that its salutary effects must manifest themselves by frustrating certain intentions and disappointing certain expectations

Errors are no longer permitted in the New Zealand labour market by the Employment Court. The Court has outlawed error in redundancy decisions.

This is despite the fact that the conception by Kirzner of the market process is that it is an error correction procedure without rival and a central role of entrepreneurial alertness is to correct errors in pricing and production:

It is important to notice the role played in this process of market discovery by pure entrepreneurial profit. Pure profit opportunities emerge continually as errors are made by market participants in a changing world. The inevitably fleeting character of these opportunities arises from the powerful market tendency for entrepreneurs to notice, exploit, and then eliminate these pure price differentials.

The paradox of pure profit opportunities is precisely that they are at the same time both continually emerging and yet continually disappearing. It is this incessant process of the creation and the destruction of opportunities for pure profit that makes up the discovery procedure of the market. It is this process that keeps entrepreneurs reasonably abreast of changes in consumer preferences, in available technologies, and in resource availabilities.

Rothbard made similar arguments about the centrality of discrepancies and error in entrepreneurship:

The capitalist-entrepreneur buys factors or factor services in the present; his product must be sold in the future. He is always on the alert, then, for discrepancies, for areas where he can earn more than the going rate of interest.

In Frank Knight’s conception of profit, there were temporary profits that arise from the correction of error:

In the theory of competition, all adjustments “tend” to be made correctly, through the correction of errors on the basis of experience, and pure profit accordingly tends to be temporary.

The Employment Court misunderstands the market process as a process of error correction. Those errors are identified through entrepreneurial alertness and trial and error. These errors are both of over-optimism and over-pessimism as Kirzner explains:

Errors of over-pessimism are those in which superior opportunities have been overlooked. They manifest themselves in the emergence of more than one price for a product which these resources can create. They generate pure profit opportunities which attract entrepreneurs who, by grasping them, correct these over-pessimistic errors.

The other kind of error, error due to over-optimism, has a different source and plays a different role in the entrepreneurial discovery process. Over-optimistic error occurs when a market participant expects to be able to complete a plan which cannot, in fact, be completed.

A considerable part of entrepreneurial alertness arises from the business opportunities created by sheer ignorance and pure error as Kirzner explains:

What distinguishes discovery (relevant to hitherto unknown profit opportunities) from successful search (relevant to the deliberate production of information which one knew one had lacked) is that the former (unlike the latter) involves that surprise which accompanies the realization that one had overlooked something in fact readily available. (“It was under my very nose!”)

The market process is a selection procedure where the more efficient survive for reasons that may be unknown to the entrepreneurs directly concerned as well as to observers and officious judges. Alchian pointed out the evolutionary struggle for survival in the face of market competition ensured that only the profit maximising firms survived:

  • Realised profits, not maximum profits, are the marks of success and viability in any market. It does not matter through what process of reasoning or motivation that business success is achieved.
  • Realised profit is the criterion by which the market process selects survivors.
  • Positive profits accrue to those who are better than their competitors, even if the participants are ignorant, intelligent, skilful, etc. These lesser rivals will exhaust their retained earnings and fail to attract further investor support.
  • As in a race, the prize goes to the relatively fastest ‘even if all the competitors loaf.’
  • The firms which quickly imitate more successful firms increase their chances of survival. The firms that fail to adapt, or do so slowly, risk a greater likelihood of failure.
  • The relatively fastest in this evolutionary process of learning, adaptation and imitation will, in fact, be the profit maximisers and market selection will lead to the survival only of these profit maximising firms.

The surviving firms may not know why they are successful, but they have survived and will keep surviving until overtaken by a better rival. All business needs to know is a practice is successful.

One method of organising production and supplying to the market will supplant another when it can supply at a lower price (Marshall 1920, Stigler 1958). Gary Becker (1962) argued that firms cannot survive for long in the market with inferior product and production methods regardless of what their motives are. They will not cover their costs.

The more efficient sized firms are the firm sizes that are currently expanding their market shares in the face of competition; the less efficient sized are those firms that are currently losing market share (Stigler 1958; Alchian 1950; Demsetz 1973, 1976). Business vitality and capacity for growth and innovation are only weakly related to cost conditions and often depends on many factors that are subtle and difficult to observe (Stigler 1958, 1987). The Employment Court pretends to know better than the outcome of the competitive struggle in the market for survival.

The Employment Court also believes employers have something akin to academic tenure. In 2010, the Court found that an employee’s redundancy was unjustified because the employer did not offer redeployment and there is no requirement that the right of the redeployment be written into the employment agreement (Wang v Hamilton Multicultural Services Trust). The particulars of this case were quite interesting:

  • A new management role was created with significantly more responsibility for training, supervision and decision making than the redundant finance administrator role, with a 50% salary increase to recognise the increased responsibilities and duties.
  • The vacancy was advertised externally but the existing finance administrator was encouraged to apply.
  • His experience and qualifications meant that he could fulfil the new role, albeit with some up-skilling.
  • He decided not to apply for it to avoid jeopardising a personal grievance claim that his redundancy was not genuine and therefore unjustified.

In the case at hand, the Employment Court held that the employer was obliged to look for alternatives to making the employee redundant. Given that he would be able to perform the new finance manager position with some up-skilling, the employer should have offered him the position rather than simply inviting him to apply for it.

The notion that an employee through training can quickly increase their marginal productivity by 50% to fill a more senior role contradicts the modern labour economics of human capital. A 50% salary increase through a bit of training would imply extraordinary annual returns on other forms of on-the-job training and formal education as well as the training at hand in the Employment Court case.

I would very much like to be in the position where I can get a 50% salary increase after a bit of training. As I recall, I required about 5-10 years of on-the-job human capital acquisition before my starting salary as a graduate was 50% higher through promotion and transfers.

In summary, the Employment Court stands apart from the modern labour economics of human capital and job search and matching as well as the modern theory of entrepreneurial alertness, and the market as a discovery procedure and an error correction mechanism. The Employment Court has fallen for both the pretence to knowledge and the fatal conceit.

France, here the New Zealand labour market comes! The Employment Court’s long march to re-regulate

If the Employment Court had its way, New Zealand case law under the Employment Relations Act regarding redundancies and layoffs would be as strict as those in France. As top employment lawyer Peter Cullen explained in the Dominion Post today:

Former Employment Court chief justice Tom Goddard said employees could not be made redundant unless the company would otherwise go to the wall.

The employer appealed.

The Court of Appeal said something quite different. Its view was that if a business could be run more efficiently without a particular position, then it was entitled to disestablish it.

The Court of Appeal made it plain that it would not critically examine the logic behind the employer disestablishing a role. If the reason behind the redundancy was genuine, that was all that really mattered. Of course a fair process and consultation ought to precede any decision, but the outcome nevertheless was that the position could go.

The Employment Court wanted the position to be the same as at that in France where layoffs are permissible only to avoid bankruptcy:

…firms still cannot lay off workers to improve competitiveness when the business is healthy; they can only make economic dismissals to preserve competitiveness when already in financial straits. In France, it ought to be legal to fix small problems before they become big.

This French standard of regulation of layoffs and redundancies, if it had survived on appeal, would have come as a surprise to many, including the OECD who rates New Zealanders having no regulation of layoffs in its Index of Employment Protection.

Source: OECD employment protection index.

But you can’t keep an activist Employment Court down. It’s next tactic was salami tactics. Chipping away at the right of the employer to run its business and decide how large its labour force is. Peter Cullen again with the Employment Court pretending it can second-guess entrepreneurial judgements and arithmetic:

In the case between Grace Team Accounting and employee Judith Brake, the Employment Court found that the decision to make Brake’s position redundant was based upon mistaken arithmetic. The Court of Appeal held that Brake’s redundancy amounted to an unjustified dismissal.

Next cab off the rank was requiring employers to give preference to redundant employees pretty much no matter what. Peter Cullen again:

In the case of Neil Wang and his employer the Hamilton Multicultural Services Trust, the trust encouraged Wang to apply for another role within the organisation.

However, the Employment Court said the trust should have considered whether they should have simply offered Wang the position without having to go through an application process.

The court found that even though the other role was not the same, it required the same skills and minimal retraining and so the trust should have simply given Wang the role.

It is standard in the redundancies and restructurings I’ve been involved with for non-managerial employees to go through internal reassignment panels. Some didn’t make it and were laid off.

It’s common for the managerial vacancies to be advertised externally so that redundant managers must compete with external applicants so that the workplace can renew itself. Quite a few managers don’t make it through this process because of the external competition.

This clear preference for existing employees is a major reregulation of the labour market. Now, every redundant employee can engage in vexatious litigation and squeeze a few thousand dollars extra out of the employer by threatening to go to the Employment Court for a second opinion on the entrepreneurial judgements of the employer. To save managerial time as well is legal fees, it’s cheaper for most employers to pay the redundant employee off with a small settlement.

Anything that makes it more expensive to fire an employee makes it more expensive to hire an employee. This will reduce job creation in New Zealand now that the French standard applies:

…businesses remain obligated to assist laid-off employees in finding other jobs and in retraining them for their new positions – a distinctly French phenomenon. For businesses with more than 1,000 employees, this limbo period before dismissal can last from four to nine months.

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Karl du Fresne

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Roger Pielke Jr.

an undisciplined academic - @RogerPielkeJr on Twitter

Great Books Guy

Reading The Classics

@STILLTish. Gender Abolition

Examining Gender Identity ideology and its impact on Women's Sex based rights and Gay Rights. Exploring how this has taken such firm root in Western societies (Cognitive & Regulatory Capture).

200-Proof Liberals

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

What Paul Gregory is Writing About

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Offsetting Behaviour

Celebrating humanity's flourishing through the spread of capitalism and the rule of law


Res ipsa loquitur - The thing itself speaks

Conversable Economist

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

Barrie Saunders

Thoughts on public policy and the media

The Victorian Commons

Researching the House of Commons, 1832-1868

Coyote Blog

Celebrating humanity's flourishing through the spread of capitalism and the rule of law

The History of Parliament

Blogging on parliament, politics and people, from the History of Parliament

Books & Boots

reflections on books and art

Legal History Miscellany

Posts on the History of Law, Crime, and Justice

Sex, Drugs and Economics

Celebrating humanity's flourishing through the spread of capitalism and the rule of law


Libertarian environmentalism

Doc's Books

A window into Doc Freiberger's library

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