The New Zealand Institute of Economic Research (NZIER) recently popped up with a study purporting to show that the “90-day trial period” (the fire at will bill) is “working”.
It’s a pretty weak definition of “working”. But it seems that rate of new hiring in small business (to which the 90 day trial applies) is falling less quickly than it is for larger businesses. While not a lot of detail is supplied (show us your error bars!) the report claims that the differences are statistically significant, and concludes:
This analysis suggests that the policy has been a success to date, demonstrating the value of flexible labour markets to employers and employees alike. This success is likely to continue when the trial period policy is extended to all firms in the New Zealand economy.
The report and its conclusions were picked up and run by all the major media outlets. As usual there was no critical analysis, mostly just cut and paste of the talking points. Only the Otago newspaper offered any kind of balance:
Council of Trade Unions president Helen Kelly said nothing in the NZIER research contradicted the point that the law stripped employees of the right to a fair hearing and allowed bosses to sack people for nothing, which the CTU had proved was happening.
“The claim that hiring has declined less in small firms than in bigger ones is hardly a ringing endorsement.”
The fact that unemployment is on the rise again certainly underscores Kelly’s point.
Unfortunately for the NZIER the conclusions of the report are nonsense. The figures may be sound enough, but there is no way to determine the cause of the (comparatively less bad) performance of small businesses. To identify the 90 day trial period as the cause is classic post hoc ergo proctor hoc stupidity. There is a much more likely explanation.
The fact is that small businesses usually do better at exactly this stage of the economic cycle. In the early stages of recovery from recession, small businesses almost always lead the way. For just a few links, see Time Magazine:
The two economists looked at companies with fewer than 50 employees, and those with more than 1,000, going back to the 1970s—a period that spanned four business cycles. They found that the bigger firms, after adjusting for their larger share of the workforce, account for a greater slice of job destruction during and after recessions—whether through layoffs or simply not hiring workers they would have otherwise. Immediately coming out of a recession, smaller companies were an unusually important source of new job growth, but once economic expansion really took hold, large companies resumed the role of job-creator, added proportionately more positions late in the business cycle.
Those findings match up with what the Society for Human Resource Management has been observing in its monthly survey of members. In the last three months of 2008, 27% of small firms (fewer than 100 employees) reported decreasing total head count, while 45% of large companies (500 or more workers) did. That trend was due to continue into this year, with 11% of small companies anticipating decreasing staff by the end of March, but 34% of large companies planning such a change.
The LA Times:
In every recession over the last three decades, it has been America’s small businesses — those Lilliputian companies with fewer than 100 employees — that stepped forward, began hiring and pulled the country out of the mire.
A recent Washington based Center for Small Business policy paper
Small businesses often lead the way out of recessions. During the 2003- 2004 recovery period from the recession from the early 2000s, businesses with fewer than 500 employees hired almost 1.9 million workers, while businesses with more than 500 employees laid off over 200,000 workers.
Smallbusinessnotes.com outlines some of the possible reasons why:
The belief that small businesses fare poorly in economic slowdowns is a common misconception. Most solidly run small businesses actually hold their own during downturns. One reason for this misconception is that entrepreneurial ventures experience a different growth curve than more established businesses. …
A number of entrepreneurs, in fact, see a downturn as a time of opportunity. Not only do they have excellent employee choices, but as other areas of the economy tighten, many larger businesses are outsourcing services that small business can step in to supply. Entrepreneurs, after all, are noted for finding opportunity in the most unlikely places – why not a recession?
And so on and so on. In short, there is no proof at all that the 90 day trial bill has bad any positive effect on employment. Internationally all the evidence suggests that small businesses should be doing slightly better at this stage of the economic cycle, and they are. End of story.