When a Spaniard moved to backward Minnesota


Tullock Lecture: Richard Epstein

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 @nztreasury @moturesearch understand its own 90-day trials research?

Media reporting and Motu’s own tweet on its research contradict its own conclusions about what it found about the introduction of 90-day trial periods for new jobs in New Zealand.

Motu’s executive summary is both as bold as the Motu tweet and directly contradicts it

We find no evidence that the ability to use trial periods significantly increases firms’ overall hiring; we estimate the policy effect to be a statistically and economically insignificant 0.8 percent increase in hiring on average across all industries.

However, within the construction and wholesale trade industries, which report high use of trial periods, we estimate a weakly significant 10.3 percent increase in hiring as a result of the policy.

No evidence means no evidence. Not no evidence but we did find some evidence in two large industries – evidence of a 10.3% increase in hiring. That is a large effect.


Both economic and statistical significance matter. Not only is the effect of 90-day trial periods in the construction and wholesale trades other than zero, 10% is large – a hiring boom. No evidence of any effects on employment of 90 day trial periods means no evidence.

Neither Treasury nor Motu understand their own research and the evidence of large effects in two industries. Can you conclude you have no evidence when you have some evidence, which they did in construction and wholesale trades? There is evidence, there is not no evidence.


The paper was weak in hypothesis development and in its literature review. It was not clear whether the paper was testing the political hypothesis or the economic hypotheses. Neither were well explained or situated within modern labour economics or labour macroeconomics. If a political hypothesis does not stand up as a question of applied price theory, you cannot test it.

The Motu paper does not remind that graduate textbooks in labour economics show that a wide range of studies have found the predicted negative effects of employment law protections on employment and wages and on investment and the establishment and growth of businesses:

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

4. Stronger employment law protections also reduce the number of young people and older workers working age who hold a job.

5. The people who suffer the most from strong employment laws are young people, women and older adults. 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.

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.

Workers who start on a trial tend to be more productive and quit less often. The reason is that there was a better job match. Workers do not apply for jobs to which they think they will be less suited. By applying for jobs that the worker thinks they will be a better fit, everyone gains in terms of wages, job security and productivity. For more information see

  • Pierre Cahuc and André Zylberberg, The Natural Survival of Work, MIT Press, 2009;
  • Tito Boeri and Jan van Ours, The Economics of Imperfect Labor Markets, MIT Press, 2nd edition (2013);
  • Dale T. Mortensen, “Markets with Search Friction and the DMP Model”, American Economic Review 101, no. 4 (June 2011): 1073-91;
  • Christopher Pissarides. “Equilibrium in the Labor Market with Search Frictions”, American Economic Review 101 (June 2011) 1092-1105;
  • Christopher Pissarides, “Employment Protection”, Labour Economics 8 (2001) 131-159.
  • Eric Brunner and Jennifer Imazeki, “Probation Length and Teachers Salaries: Does Waiting Payoff?” Industrial and Labor Relations Review 64, no. 1 (October 2010): 164-179.
  • Andrea Ichino and Regina T. Riphahn, “The Effect of Employment Protection on Worker Effort – A Comparison of Absenteeism During and After Probation”, Journal of the European Economic Association 3 no. 1 (March 2005), 120-143;
  • Christian Pfeifer “Work Effort During and After Employment Probation: Evidence from German Personnel Data”, Journal of Economics and Statistics (February 2010); and
  • Olsson, Martin “Employment protection and sickness absence”, Labour Economics 16 (April 2009): 208-214.

In the labour market, screening and signalling take the form of probationary periods, promotion ladders, promotion tournaments, incentive pay and the back loading of pay in the form of pension vesting and other prizes and bonds for good performance over a long period.

There is good reasons to have strong priors about how employment regulation will work. Employment law protects a limited segment of the workforce against the risk of losing their job. These are those who have a job and in particular those that have a steady job, a long-term job.


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 are low pay or often pay the minimum wage. Motu found large effects on hiring in two industries that used trial periods frequently. That vindicates the supporters of the law. 

Motu said that 36% of employers have used trial periods at least once. The average is 36% of employers have used them with up to 50% using them in construction and wholesale trade. That the practice survives in competition for recruits suggested that it has some efficiency value.

The large size of the employment effect in construction and wholesale trades is indeed a little bit surprising. Given that a well-grounded in economic theory hypothesis about the effect of trial period is ambiguous in regard to what will happen to wages and unemployment, a large employment effect is a surprise. If Motu had spent more time explaining employment protection laws and what hypotheses they imply, that surprise would have come to light sooner.

Motu’s research for the remaining New Zealand industries was a bit of an outlier. It should have spent more time explaining how to manage that anomalous status in light of the strong priors impartial spectators are entitled to have on the economics of employment protection laws.

A conflicting study about the effects of any regulation should be no surprise. If there are not conflicting empirical studies, the academics are not working hard enough to win tenure and promotion. Extraordinary claims nonetheless require extraordinary evidence.


Does labor market regulation really protect the interests of workers?

McDonald’s Workers Just Lovin’ Their #ZeroHoursContracts @suemoroney @IainLG @FairnessNZ

Revealed preference rules. Not only do about half of unemployed turned down offers of zero hour contract jobs, those that switch from a zero hours contract to minimum hours are not much different from the number of people in these type of jobs who would be quitting to another job anyway.


Source: McDonald’s Workers Are Just Lovin’ Their Zero Hours Contracts – Forbes and McDonald’s offer staff the chance to get off zero-hours contracts | UK news | The Guardian.

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.

#TPPANoWay sovereignty objections apply equally to @ILO conventions

New Zealand has signed and ratified dozens of International Labour Organisation Conventions dating back to 1921. They all fetter the sovereignty of New Zealand. As a member of the ILO, New Zealand is required to report on its application of ILO Conventions.

That limitation on the sovereignty of New Zealand is no more and no less than in an international trade agreement. New Zealand can renounce an international trade agreement and has renounced nine International Labour Organisation conventions.

Jane Kelsey makes the following points about the legal implications of the Trans-Pacific Partnership agreement:

The 30 chapter Trans-Pacific Partnership Agreement (TPPA) constrains domestic law and policy at central government level, and in places by local government and SOEs, in diverse areas beyond traditional aspects of international trade.

…The TPP provides cumulative opportunities for foreign states and corporations to influence domestic decisions which may be burdensome and intrusive.

The exact same objections apply to the ILO conventions. The union movement does not hesitate to argue that the democratic process in New Zealand should be overridden because the proposal at hand purportedly conflicts with an ILO convention.

For example, when the government was choosing to deregulate collective bargaining, the sovereignty of Parliament was questioned because of an ILO convention. Helen Kelly, CTU President said:

in Parliament on 4 June, the Minister was asked if he agreed with advice from officials that the ability for employers to opt out of multi-employer bargaining may breach our obligations under ILO Convention 98 on the right to organise and collective bargaining.

…There is no point attending such an important UN ILO conference at the time your Government is being advised it is breaching its undertakings to that very organisation…

The CTU President also referred to the regulatory impact statement prepared for that collective bargaining legislation:

The paper also points out that these changes open NZ up to international examination by the International Labour Organisation (ILO) for non-compliance with Convention 98 – on the Right to Organise and Collectively Bargain, which New Zealand has signed up to.

Helen Kelly says “at least four of the proposals are deemed to be inconsistent with our international obligations, and two of them are classified as uncertain. Why the Government wants law changes that damage our international obligations is unclear.”

Council of Trade Unions submissions to minimum wage reviews have at least a dozen references to ILO conventions and the requirement to honour their provisions.

Posner and Goldsmith rightly argue that international law is a product of states pursuing their interests on the international stage. It does not induce states to comply contrary to their interests. The possibilities for what it can achieve are limited.

Government sign-up to various international agreements depending on their political priorities. You cannot complain that governments that you did not vote do what government you voted for also did, which was sign up to international agreements that suited their political agendas. The solution is to work harder to win the next general election.

As for opposing trade agreements on sovereignty grounds, it is rank hypocrisy for the union movement to do so given the number of times it cites international labour agreements when it suits them and seeks their inclusion in trade agreements to raise labour costs in developing countries.

@nzlabour @FairnessNZ My first Parliamentary submission – opposing regulation of zero hours contracts

This Labour Party link made it very easy for me to submit to the Select Committee of Parliament to oppose the Bill on regulating zero hours contracts. I oppose the Bill for the exact opposite reasons that the Labour Party opposes the Bill.

I encourage others to make a submission to Parliament as well opposing this draft amendment that will lower the wages of workers. My submission is as follows:

I do not support the proposed changes to the legislation governing zero hour contracts in the Employment Standards Legislation Bill. There should be no regulation of zero hours contracts.

Zero hours contracts is creative destruction at work in the labour market, sweeping away obsolete working time arrangements, mostly in the retail services sector. Plenty of new ways of working have emerged in recent years that include the proliferation of part-time work, temporary workers, leased workers, working from home, teleworking and sub-contracting. Employment laws were built on the now decaying assumption that workers had career-long, stable relationships with single employers.

Advance notice of work schedules is always known only to a minority of temporary and permanent employees in New Zealand, and there’s not much difference between that advance notice between temporary and permanent employees.

Critics overplay their hand if they suggest that somehow workers are very much disadvantaged and employers are holding all the cards. Job turnover and recruitment problems are a serious cost to a business. Workers will not sign zero hours contracts if they are not to their advantage.

Unless labour markets are highly uncompetitive with employers having massive power over employees, employers should have to pay a wage premium if zero-hour contracts are a hassle for workers.

The fixed costs of employment are such that you shouldn’t expect zero-hour contracts: you’ll typically do better with one 40-hour worker over two 20-hour workers because of these costs. Zero hour contracts would be most likely in jobs with low recruitment costs and where specialised training needs are low. Workers with low fixed costs of working will move into the zero-hour sector while those with higher fixed costs would prefer lower hourly rates but more guaranteed hours. Again, read lower here as meaning relative to what they could elsewhere earn.

Unless we have a good idea about why firms are moving to zero hours contracts, which we don’t, and why employees sign these contracts rather than work for other employers who offer more regular hours, meddling in these novel working time arrangements is risky.

Employers must pay a wage premium to induce in workers to sign zero hours contracts. This Bill seeks to deny workers the right to seek higher wages.

Feel free to use the above text as the basis for your own submission to Parliament.

Unemployment rates across the OECD member countries

The impact of neoliberalism on labour market freedom in Argentina, Brazil, Chile and Venezuela

All was quiet on the neoliberalism front in Latin America for the last 20 years. In yet another defeat for the Mont Pelerin Society led transnational conspiracy, labour market freedom has declined in the four countries in figure 1. I’ve always had my doubts about the ability of a transnational conspiracy to be led by a society with such a crappy website.

Figure 1: Index of Economic Freedom, Argentina, Brazil, Chile and Venezuela, 95 – 2015


Source: Index of Economic Freedom 2015.

Trends in labour market freedom in the UK, USA, Germany and France – Index of Economic Freedom rankings

The writers of the Index of Economic Freedom at the Heritage foundation really loves the USA and didn’t think much of the Conservative Party – Liberal Democratic Party coalition government because labour market freedom actually fell in the UK during their administration. Bring back Tony Blair, all is forgiven. The information on their website throws no insight into why this reduction in labour market freedom in Britain happened.

Figure 1: Index of Economic Freedom, Argentina, Brazil, Chile and Venezuela, 95 – 2015 image

Source: Index of Economic Freedom 2015.

Fortunately for Germany, labour market freedom increased over the course of the global financial crisis and its aftermath. This helps explains low unemployment in Germany during that period. Nothing much happened in France in regard to labour market freedom.

Greece’s far left government must out-do Maggie Thatcher and Roger Douglas all by Wednesday to qualify for their bailout!

@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.

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