Unfair dismissal laws deter firing and hiring

Joblessness is a major cause of poverty. Getting the poor into work is therefore the key to alleviating poverty. The problem, however, is that there appear to be too few jobs.

Persistent unemployment points to a shortage of jobs. The unemployment rate for June 2002 was 6.5%. This is high in light of continuing strong economic growth.

Being jobless, in fact, is by no means an unusual experience. The majority of us probably go through short spells of unemployment after leaving school, when changing jobs, and so forth.

Long-term unemployment, however, is a source of serious concern. More than a third of all unemployed Australians have been out of work for over 26 weeks; the average duration of unemployment is a staggering 50 weeks.

Some analysts attribute the shortage of jobs to excessive employment protection. One example is the unfair dismissal laws provided in the Commonwealth Workplace Relations Act 1996.

The unfair dismissal laws are intended to protect federal award employees from ‘harsh, unjust or unreasonable’ termination of employment. There are, however, unintended consequences: the unfair dismissal laws deter not only firing but also hiring.

Unfair dismissal claims can impose prohibitive costs on employers. These include severance pay and legal fees. In addition, employers have to spend considerable time and energy attending conciliation and arbitration proceedings. It is easier for employers not to sack anybody in the first place.

The firing costs at the same time make employers reluctant to take on additional staff. If a new recruit turns out to be unsatisfactory, employers can no longer fire him or her without paying dearly. Risk-averse employers would rather encourage their existing employees to work harder and longer, thereby holding at a minimum the number of possible firings.

The unfair dismissal laws have a disproportionate effect on small businesses. Small business employers, unlike their large and medium business counterparts, do not have the financial and human resources necessary to cope with unfair dismissal allegations.

This is the problem that the Fair Dismissal Bill is designed to address. The Bill, introduced to Parliament in February this year, exempts from the unfair dismissal laws firms with fewer than 20 employees; it thus represents an attempt to boost employment in the small business sector.

The small business sector plays a significant role in the labour market. Over the past two decades, it provided close to half of total employment; it also experienced stronger job growth than the large business and medium business sectors combined.

Small business employment would grow further if the unfair dismissal laws are relaxed. A survey conducted by the Australian Chamber of Commerce and Industry in 1999 found that 54% of small business employers might have hired more employees over the previous 12 months had it not been for the unfair dismissal laws. This is disputed by CPA Australia, whose survey found the corresponding figure to be a mere 5%. But even if only 5% of small businesses employed one extra person, more than 50,000 new jobs would be created.

Opponents of the Fair Dismissal Bill argue that it will undermine job security for working Australians. What they are actually saying is that the unfair dismissal laws favour the ‘insiders’—those already in jobs—over the ‘outsiders’. Labour market participants, once jobless, face a greater risk of long-term unemployment. Young people without adequate education, training or experience are at a particular disadvantage.

Moreover, not every insider is necessarily at an advantage. The unfair dismissal laws can lock workers in jobs that are ill-suited for them. Their employers hesitate to let them go because of the unfair dismissal laws; other employers hesitate to hire them because of the unfair dismissal laws.

The unfair dismissal laws, in their present form, benefit few people. To boost jobs, and thus to combat long-term unemployment, they need to be amended in such a way that small businesses will feel more confident about hiring.

Of course, small business exemption is not a panacea for the long-term unemployment problem. It is, however, one step towards the broader goal of job creation. And the more jobs are created, the more can be achieved in alleviating poverty.

 

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About the Author:
Kayoko Tsumori is a Policy Analyst at The Centre for Independent Studies, and author of  Issue Analysis24:Poor Laws (1). To read the paper, click HERE