By Eric Crampton 20/06/2016

Motu’s had a look at the effects of the 90 day trial legislation. Under that legislation, employers could hire employees on a trial basis and dismiss them relatively easily within that 90 day window.

Supporters of it expected it to encourage employment of riskier employees; opponents expected substantial churn: that employers would somehow figure it made sense to hire people for three months, fire, rinse and repeat.

The Motu study

The Motu study, undertaken by Nathan Chappell and Isabella Sin, two fine Canterbury economics graduates, uses a beautiful little natural experiment. Firms smaller than 20 employees were allowed to use the provision; those over it were not. At least for a time. Afterwards, it extended. But you had a nice little period in which there was a discontinuity at 20 employees. They then looked at hiring data in for firms in the 15-25 employee range. If the bill had effects, that’s where the difference would show up.

Using that experiment they find, well, very little in the aggregate. There was no particular boost to employment, but neither was there any churn. It didn’t seem to do anything at all.

But there is a bit of a problem in focusing on the aggregate. If you’re looking at effects across all firms, and only a minority of firms would ever want to use the trial periods, then if there were an effect for that group of firms, you likely wouldn’t see it in the aggregate data. The data doesn’t let them tell which firms actually elected to hire new employees on trial arrangements, and which offered permanent contracts from the get-go.

Or to put it another way, suppose that some medicine reduced your chance of death from a relatively uncommon disease by 10%. You wouldn’t notice any effect at all in overall aggregate national death rates. But you would notice it if you looked in the places where it were used.

This could matter

They cite MBIE work showing greater uptake of trial periods in construction and wholesale trades and low use in education and training; they then find a about a 10% increase in hires among small firms in industries known to use trial periods who were eligible to use trial periods as compared to small firms in the same industry that were just a bit too big to use trial periods. Those small firms eligible for 90-day trial periods in high-use industries had about a 7% increase in long-term hires.

Evidence that it particularly encouraged employment of riskier employees is rather weak, or at least riskier as measured by things like being a former beneficiary.

On the whole, it looks like the policy provided an increase in employment in construction companies and wholesale trades, no increase in churn or dismissals. If you think that people bear substantial psychological costs of a 90-day trial period where actual dismissal rates are trivial, then you might not like the policy. If you think that those are likely to be minor relative to the employment benefits in the sectors that need it, then the policy remains a good one. And if you’re going to weigh the psychological costs of uncertainty for employees under trial periods, weigh too the psychological costs for employers having to make hires under conditions where firing is very difficult.

It might not be as beneficial as we had hoped at the outset, and so it might have been a mistake when evaluated against other beneficial policies on which the government could have expended political capital (youth minimum wages, for example), but it’s a policy well worth continuing.

Crossposted from The Sandpit.

Featured image: CC Pixabay