CTU Economic Bulletin No. 115 : 90-day Fire at Will Period - low road policy without evidence

July 2010

The Prime Minister made a number of claims when he announced the extension of the 90-day trial provisions to all employees. At time of the announcement, the government made a deliberately delayed release of a Department of Labour research report, apparently to support the law change. The research was unbalanced, surveying only 13 employees, but it does not provide evidence for his claims. Instead it provides cause for concern. If you want to read the full report, details are below, but here are highlights. A longer analysis is available on request.

The report itself states: "it cannot be stated categorically that trial periods had created extra job opportunities. The international literature suggests that exemptions to employment protection legislation, such as the trial period legislation, increase both hiring and firing but have an unclear overall impact on unemployment".

The report showed no evidence of this. Employers did not treat such employees any differently: "Employers tended to use trial periods with all or none of the employees, rather than only with some of them." Indeed, such treatment could well be seen as illegal discrimination on the basis of gender, ethnicity, national origin or age. The report concludes that "while employers acknowledged that trial periods could give a chance to disadvantaged job seekers, very few of them used trial periods specifically for this purpose, being focused on hiring the most suitable candidate."

The Prime Minister quoted the report as evidence of success that "in relation to the last employee they hired on a trial period, 40 per cent of employers said they would not have, or were unlikely to have, hired that person without the trial period". That provides no evidence for any policy conclusion. Employers enthusiastic for the law would say that. Was the person they hired actually from a disadvantaged group? Would they not have needed a worker if the law was not in place?

Claim: the 90 day trial period can only be entered into by written agreement

In fact some of the employers failed to put the conditions in writing, and the conditions, in writing or not, were mostly non-negotiable. Employers, said the report, "generally did not directly seek employees' acceptance of a trial period, rather it was stated in the employment agreement with other terms and conditions. Thus in practice, for many employees the job offer was conditional on their accepting a trial period". Employees said their employers had not discussed the conditions with them.

There are examples of employers acting responsibly, but also considerable evidence of irresponsible actions. Some employers did not act within even the light-weight requirements of this law, such as to put the condition in writing. Some were using it as a way to take on short term employees. A number applied it illegally to existing staff who were being moved between jobs and whose suitability for the job should have been well known to the employer. One such employee was dismissed on the grounds of "inexperience". Many employers did little monitoring of the employee's performance. Some used the provision as a "safety belt" for all new appointments, implying a general degradation in the rights of new employees no matter what their experience and capability. An employee with disabilities was asked to sign up to a new agreement including the 90-day provision two weeks after starting work, again illegally, and was then dismissed on that basis. The employees surveyed felt more vulnerable to dismissal and unfair treatment and generally lacked job security. A high proportion of those on 90-day trial were dismissed: 22 percent or almost a quarter.

Even if most employers acted responsibly (and the sample of employers does not allow us to conclude that one way or another) the crucial point is the significant evidence of irresponsibility. Employment law is there to protect against abuse of the "inherent inequality of power in employment relationships" (quoting the Employment Relations Act). Even irresponsibility by a minority can affect many employees. For each of them their livelihood, dignity and future employment prospects are at stake.

Some employers commented that an employee could "behave" for the 90 days and then "relax" as soon as it was over. That indicates not only that some employers have an attitude problem but also the futility of this trustless method of appointment.

This was primarily a survey of employers' views, so the high rate of misgivings among the few employees surveyed is remarkable. They resented the insecurity and vulnerability. Those dismissed felt unfairly treated, and had been given no reason for their dismissal.

The legislation encourages employers to use dismissal rather than avoiding the need for it by good interview and employment practices. As Erling Rasmussen, Professor of Work and Employment at AUT University says, the "law changes will mean employers that don't have suitable HR systems in place won't need to change their practices and are in fact supported by legislation. This is a big step backwards in protection of employees ... This practice is not balanced or sustainable. We're not building a high waged, highly skilled, highly productive economy."

The 90-day trials are part of a "low road" approach to employment. In the 1990s this road led employers to rely on low wages and skills, building a distrustful and ultimately unsustainable workplace environment. It corrodes the trust required for those wishing to take the "high road" of long term, respectful employment relationships which strengthen productivity, skills, work satisfaction, and wages.

The Department of Labour report is "Trial Employment Periods - an evaluation of the first year of operation", by Roopali Johri and Louise Fawthorpe, June 2010, available at http://www.dol.govt.nz/publications/research/trial-periods/trial-periods-evaluation.pdf

NZIER Consensus Forecasts¹

These consensus forecasts were published on 22 June 2010. Items marked "*" are actuals from Statistics New Zealand rather than forecasts.

Economic Snapshot

• Gross Domestic Product (GDP) increased by 0.6 percent for the March 2010 quarter. But in annual terms it has still declined 0.4 percent.
• The Consumer Price Index (CPI) rose by 1.8 percent for the year to June 2010 and by 0.3 percent for the quarter.
• Unemployment was at 6.0 percent in March 2010. Maori unemployment was 14.2 percent, Pacific unemployment was 14.4 percent, Asian unemployment was 9.8 percent and European/Pakeha unemployment was 4.4 percent. Youth unemployment (15-19 year olds) was 25.2 percent. In June 2010, 62,085 people were on an unemployment benefit.
• The total number of people in employment decreased in the year to March 2010 by 0.1 percent to a total of 2,177,000.
• The minimum wage is $12.75 an hour and $10.20 an hour for new entrants aged 16 or 17 in their first 3 months or 200 hours, whichever ends first.
• Ordinary time hourly wages, as measured by the Quarterly Employment Survey (QES) for March 2010, were up 2.2 percent in annual terms (1.6 percent in the private sector and 3.7 percent in the public sector). The average ordinary time hourly wage is now $25.27 ($23.35 in the private sector and $32.56 in the public sector). The average female wage is $23.50 which is 87.7 percent of the male wage of $26.79. The Labour Cost Index (LCI) shows that salaries and ordinary time wages went up by 1.5 percent in the March 2010 year (1.3 percent in the private sector and 2.3 percent in the public sector). For those workers who received a pay rise in the year, the median increase was 3.3 percent and the average increase was 3.9 percent.
• On 29 July, the Reserve Bank lifted the Official Cash Rate by 25 basis points to 3.00 percent. The next review will be on 16 September 2010.

Consumer Price Index

The CPI rose 0.3 percent for the June 2010 quarter following a 0.4 percent rise in the March 2010 quarter. For the year to June 2010 annual inflation is now 1.8 percent. While food prices have been falling (see below), this has been offset by the increase in excise duty on cigarettes at the end of April that saw tobacco prices rise 8.7 percent, petrol rising 1.4 percent, electricity up 1.0 percent and rents up 0.5 percent for the quarter. On a yearly basis petrol prices have now risen 9.5 percent. Prices of non-tradables (goods and services that do not face foreign competition) increased 2.2 percent for the year to June 2010, while tradables rose 1.1 percent. Annual increases for non-tradables have been 2.3 percent or less for the last three quarters, whereas they had been at least 3.0 percent for the seven years before those.

Food Prices

In June, food prices were down 2.0 percent on the same time last year. This is the largest annual fall since the measurement began in 1960. And this is despite the fact food prices actually rose 1.3 percent between May and June of this year. For the month fruit and vegetables (9.3 percent), meat, poultry, and fish (2.7 percent), and restaurant meals and ready-to-eat food (0.3 percent) were up, but grocery food (0.8 percent) and non-alcoholic beverages (0.8 percent) were down.

Beneficiary Numbers

In June 2010, 333,000 working age people were receiving social security benefits in New Zealand. This compares with 290,000 in June 2005 and 310,000 in June 2009 (up 7 percent). The current figures are made up of 112,000 people receiving domestic purposes benefit (up 7 percent on the year to June 2009), 85,000 receiving invalids benefit (up 1 percent), 62,000 receiving unemployment benefit (up 22 per cent) and 58,000 receiving sickness benefit (up 8 per cent).Numbers receiving main benefits decreased by 32,000 (11 percent) between June 2005 and 2008, then rose by 75,000 (29 percent) in the two years ended June 2010. Of working age people currently receiving a benefit, 57 per cent were female, 32.1 were Maori and 18.5 per cent were between 18 and 24 years of age.

The proportion of long term unemployment beneficiaries is steadily rising. The graph shows the proportion who have been on the unemployment benefit continuously for a year or more. The proportion was higher until June 2008 - but at that point there were only 18,000 people on the unemployment benefit, and the unemployment rate was near its lowest, making it likely that the remaining people on the benefit were those finding it very hard to find jobs. The proportion fell steadily until June last year, since when it has more than doubled.

Overseas Goods Trade

For the month of June 2010, exports compared to June 2009 were up $552 million (17 percent) to $3.8 billion, imports were down $56 million (1.6 percent) to $3.5 billion, and the trade balance was a surplus of $276 million (7.3 percent of exports). The biggest increases in value for exports were milk powder, butter, and cheese (up 15 percent) and logs, wood, and wood articles (up 12 percent). The biggest movement in imports occurred in military and other goods because of the delivery of HMNZS Otago. For the June 2010 quarter the value of both imports (seasonally-adjusted up 5.8 percent) and exports (seasonally-adjusted up 6.8 percent) rose from the March quarter. Milk powder, butter, and cheese made up half of the quarterly increase in export values.

Manufacturing Sector

The Performance of Manufacturing Index (PMI) lifted to 56.2³ for June 2010. All five sub-indices were positive, including employment (52.4), which had bucked the trend since April. All regions were also in expansion, led by the Otago/Southland region (58.4). On an industry basis only petroleum, coal, chemical & associated product (49.9) and metal product manufacturing (48.8) remained negative. Internationally, New Zealand remains above the Global PMI for June of 55.0.

Service Sector

The Performance of Service Index (PSI) for June was 55.7³, up 2.2 points from May. All five sub-indices were "positive" with employment jumping 4.5 points to 55.2. There was, however, significant variation regionally with the Northern region recording a very positive 58.1 but Otago/Southland falling to only 38.7. At a sector level, property & business services continued to be positive (60.1), but retail trade declined further (41.5), and accommodation, cafes & restaurants (39.9) continued their slump.

Property Values

Property values weakened in June. Quotable Value's national index of property values has fallen to 5.2 percent above the same time last year, down from the 5.6 percent in May. However there is significant regional variation. The biggest increases in value continue to be in the Auckland region where values are, on average, up 7.9 per cent on the same time last year and the average sale price is $537,412. In contrast Whangarei (-1.1 percent), Rotorua (-2.1 percent) and Gisborne (-0.9 percent) are experiencing lower property values than a year ago.

Building Consents

The value of residential building consents rose 12 percent for the year to June 2010. On the other hand, the value of non-residential consents fell 18 percent. In the residential sector this was based on the authorisation of 15,384 new housing units and 783 new apartment units over the year, representing a 25 percent increase and a 58 percent decrease respectively. These numbers are still very low: the number of new apartment units is the lowest since 1994, and the number of new housing units excluding apartments is the second lowest (next to last year) since the series began in 1991. However new dwelling numbers did rise for the month of June: 3.5 percent including apartment units and 1.7 percent without them in seasonally adjusted terms.

Work Stoppages

There was only 1 completed work stoppage recorded in the March 2010 quarter and only 30 completed stoppages in the year to March 2010. Of those, 24 were complete strikes, five were partial strikes, and one was a lockout. In total they involved 18,240 person days of work and $3.1 million in lost wages.

Migration

In June 2010 unadjusted permanent or long term (PLT) departures from New Zealand outnumbered arrivals by 700. In seasonally adjusted terms this translates to a net increase of 100 - the lowest seasonally adjusted monthly growth since November 2008. For the month, the largest increase in migrants came from India (400), China, (200) and the Philippines (200). But this was more than offset by a net outflow to Australia of 1,800. On an annual basis this translates to migration growth of 16,500 for the June 2010 year, compared with 12,500 in the June 2009 year. For the year there have been 65,800 PLT departures, down 13 percent from the June 2009 year, and 82,300 PLT arrivals, also down, by 7 percent.

Retail Sales

Retail sales were up 0.4 percent overall ($24 million) for the month of May 2010. However this was primarily driven by motor vehicle retailing, which increased 7.5 percent ($43 million), and other automotive-related categories. The rest of retailing actually decreased 0.2 percent ($10 million). Particularly large decreases occurred in accommodation (down 3.6 percent) and cafes and restaurants (down 2.0 percent).

Online Job Vacancies

The Department of Labour's quarterly survey on job vacancies advertised online shows a 9.4 percent increase in the number of jobs advertised in the three months to the end of June 2010. For skilled jobs the increase was 10 per cent. All regions and industries saw a rise in skilled vacancies. The fastest growth regionally was in the North Island outside Auckland or Wellington (10.1 per cent) and the in the construction and engineering industry (14.9 per cent). Vacancies have increased steadily from a year ago - the number of advertised vacancies for skilled jobs has increased by 33.6 per cent on June 2009, while total vacancies have increased by 36.9 per cent.

Government Financial Statements

For the year to the end of May 2010, the government's operating balance (before gains and losses) was a $4.7 billion deficit, $1.1 billion less than budgeted. This was caused by both a $243 million rise in expected revenue and $558 million reduced expenditure. ACC insurance expenses were also $129 million lower than expected due to lower claims costs. Including gains and losses, the deficit was $2.2 billion, slightly more than budgeted. The difference in results between the two deficit measures was largely due to Debt Management Office assets being less than expected, though shares owned by government entities also lost value due to falls in international sharemarkets as a result of the events in Europe. The Government's net debt was $25.4 billion, or 13.6% of GDP and close to forecast while gross debt at $52.6 billion and 28.1% of GDP was $685 million lower than expected.

District Health Board finances

Unaudited DHB financial results for the year to June 2010 showed a combined deficit of $99.3 million, compared to a planned deficit of $115.5 million. Largest deficits were at Capital and Coast DHB ($47.5 million, close to plan) and Southern DHB ($15.2 million, also close to plan). The largest surplus was at Waikato DHB which, at $18.9 million, was $8.9 million ahead of plan, the best financial result against plan of any DHB. MidCentral DHB fared worst against plan with a deficit of $9.5 million which was $5.9 million more than planned.

Notes

1 The consensus is made up of the average of forecasts from NZIER, Berl, ANZ- National Bank, ASB Bank, BNZ Bank, First New Zealand Capital, Deutsche Bank, UBS, Westpac, Reserve Bank of New Zealand and Treasury. Because the consensus forecasts are done only every 3 months, some of the more recent forecasts will be more accurate.

2 As measured by Statistics New Zealand's Quarterly Employment Survey.

3 A figure under 50 shows the sector is contracting; above 50 shows that it is growing. The index is an early indicator of business activity.