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You're evicted, eliminated, fired!

By Andrew Leigh and Justin Wolfers - posted Thursday, 23 June 2005

More firings could be good news for the long-term jobless.

After a season of Big Brother (“you’re evicted”), The Amazing Race (“you’re eliminated”) and The Apprentice (“you’re fired”), it is no wonder that unfair dismissals are back on the political agenda.

Yet the truth is that businesses don’t have things so bad: Australia has the sixth-weakest employment protection of 30 member countries of the Organisation for Economic Co-operation and Development (OECD). And just like those reality shows, these reforms in policy are more about ratings than substance. At most, by exempting firms with fewer than 100 employees, the Industrial Relations reforms will shift one in seven workers outside the scope of the unfair dismissal regime.


How will the changes affect the unemployment rate? So far, two opposing arguments have been mounted. From the union movement, we have heard that the changes will make it easier to fire workers. More firing, more unemployment.

On the flip side, employer groups and the federal government have argued that the changes will make firms more likely to hire workers. More hiring, less unemployment.

Economic theory tells us both sides are right, so we need to look to empirical studies to see how these competing effects balance out. Despite the Prime Minister’s best misrepresentations to the contrary, the most careful cross-country studies have found little evidence of a robust relationship between employment protection and the unemployment rate.

While his supporters point out that high employment protection in Europe may be a cause of high levels of unemployment, opponents note that Europe had even higher employment protection and substantially lower unemployment in the 1960s.

The closest similar reform that we can think of was a 2004 German law that exempted some small businesses from employment protection laws.

Afterwards, a careful study by Thomas Bauer, Stefan Bender and Holger Bonin found that this law had essentially no effect on the German labour market. If John Howard thinks his unfair dismissals reforms will bring the headline unemployment rate down from 5.1 per cent to 4 per cent, we should bring in Darryl Kerrigan to tell him he’s dreaming.


Yet, while the unfair dismissals reforms probably won’t affect the overall unemployment rate, they are likely to have two positive effects. Oddly, both have been ignored in the Australian debate.

First, less employment protection will mean more hiring and more firing and, hence, more job churning.

For those with jobs, this may not sound like a particularly enticing prospect, but for the unemployed it matters a lot. The flip side of greater certainty that those with jobs will remain employed is greater certainty that the unemployed will remain unemployed.

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Article edited by Tanvi Mehta.
If you'd like to be a volunteer editor too, click here.

First published as “Unemployed finally get chance to work” in the Sydney Morning Herald, June 16, 2005.

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About the Authors

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

Dr Justin Wolfers is an Assistant Professor of Economics at Business and Public Policy Department of the Wharton School, University of Pennsylvania.

Other articles by these Authors

All articles by Andrew Leigh
All articles by Justin Wolfers

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