Statistics Show They're Hiring, not Firing

By Mark Wooden

The Australian Financial Review
7 September 2006, p. 63

Total employment in Australia grew by 2.2 per cent in the 12 months to July. This was a fairly modest result, being about the annual average growth rate over the last five years. Almost 70 per cent of that net yearly growth, however, occurred in the last three months. Indeed, (seasonally adjusted) employment grew by 1.5 per cent between April and July.

According to Mr Andrews, Minister for Employment and Workplace Relations, at least some of the credit for this surge in jobs growth must go to the Work Choices legislation that became law at the end of March. Most academics will tell you that it is too early to reach such a conclusion, and they are probably right. Nevertheless, the early indications are promising for the Government.

So what is the argument that Mr Andrews might use to support a link between Work Choices and this recent employment growth? In my view the most plausible mechanism is via the changes in dismissal laws. Work Choices removes most constraints on firing by businesses with fewer than 100 employees and also make firing easier for large firms, which should encourage firms to adopt less conservative attitudes towards hiring. Such changes can be expected to be most marked in small businesses which lack the resources necessary to both effectively screen and select new employees and to manage employees who subsequently turn out to be poor fits with the business.

What then is the evidence that Mr Andrews might draw on to support his claim that Work Choices is already fostering higher rates of job growth than otherwise would have occurred?

First, and as noted above, the rate of growth in employment in recent months is stunning. We certainly have to go back a long time 1994 to find another 3-month period with a comparable rate of growth. Perhaps most significantly, the rate of employment growth in recent months has been far in excess of that predicted by most economic forecasters. For example, the Melbourne Institute forecast, when using data up to the March quarter of this year, was that employment growth for the June quarter (and indeed the remainder of the year) would average around 0.5 per cent. The actual result for the June quarter was double this. Given forecasting models are unable to account for the impact of institutional changes on the labour market, this is exactly what would be expected if Work Choices was having this positive employment impact.

Second, the strong recent employment growth is not overly concentrated in any one State. While Queensland is clearly the standout performer, rates of employment growth over the last three months in the other States have all been high, ranging from 1.0 to 1.3 per cent.

Third, the teenage labour market has fared particularly well, with employment among teenagers up by 2.7 per cent in the three months to July. The reason why this figure is relevant is that teenage jobs tend to be concentrated at the end of the labour market where pay is lower and skills are less important, and it is with these types of jobs that we expect an easing in restrictions on firing to have the biggest effects.

On balance, Mr Andrews claims appear to be more than just political grandstanding; they do appear to have some basis in evidence.

That said, it still remains to be seen whether these promising trends will be sustained. Month-to-month movements in employment are known to be highly volatile; for all I know, the employment gains of recent months will evaporate with the release of new employment figures out today.

More illuminating will be the release of more detailed employment by occupation data next month. As already indicated, we would expect the changes in dismissal laws to have their biggest impact on employment in the least skilled occupations. The latest figures available (for May) provide no support at all for this thesis, with employment growth strongest in the professions and trades. If there is not a sharp reversal in this pattern in the August figures it will be difficult to attach much credence to the argument that a less restrictive firing regime has fostered jobs growth.

Finally, it must be acknowledged that a less restrictive firing regime should encourage not only more new hires but also more fires. Some of the initial growth in employment from new hires can thus be expected to be offset by an increase in firing rates at some point in the future.

Mark Wooden

Professorial Research Fellow and Deputy Director, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne