Source: Unmitigated Gauls (1998).
Source: Paul Krugman (1997) Unmitigated Gauls.
There are a wide differences across the OECD in mandatory severance pay in the event of a layoff.
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.
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.
My search for an example of how Danish flexicurity might have an advantage over the status quo in the New Zealand labour market is still to yield results. Danish flexicurity is no better than New Zealand and often worse in keeping long-term male unemployment rates down as the charts below show. The flexicurity model combines flexible hiring and firing with a generous social safety net and an extensive system of activation policies for the unemployed.
The charts above and below do show is that a more generous social safety net for the unemployed introduced with the onset of the Great Recession in the USA was followed by a sharp increase in the incidence of long-term unemployment.
Denmark is all the go in the New Zealand Labour Party as a model for labour market flexibility despite the fact that it is much more heavily regulated than either New Zealand or the USA.
Source: Linda Regber.
The boom that preceded the bust in the Greek economy did nothing for the rate of long-term unemployment among Greeks. Long-term unemployment had been pretty stable prior to the economic boom after joining the euro currency union.
Source: OECD StatExtract.
Nothing much happened to long-term unemployment in Italy or Portugal in recent decades. Spanish long-term unemployment fell in line with the economic boom in Spain over the 1980s and 1990s up until the global financial crisis.
The chart below shows that New Zealand is far more flexible than Western Europe and is pretty near the USA in terms of people moving in and out of the unemployment pool every month with great ease. There are very high outflow rates from unemployment among the Anglo-Saxon and Nordic economies. The economies of Continental Europe stand in stark contrast. Unemployment outflow rates in these economies lie below 10% at a monthly frequency.