90 day trial periods have little to no effect

17/06/2016

The introduction of 90-day trial periods in 2009 was controversial, with the government promoting the initiative as likely to increase hiring, particularly of disadvantaged job-seekers, and unions concerned that workers would be at risk of unscrupulous employment practices.

Now a new study from Motu Economic and Public Policy Research Trust has shown that the policy has had little if any effect.

“My research shows that the 90-day trial period isn’t helping people get jobs,” said Isabelle Sin, Fellow at Motu. “However, it also doesn’t make people less likely to leave secure jobs and doesn’t make employment relationships less stable. Overall, my research suggests the 90-day trial policy isn’t doing much at all.”

Trial periods were introduced for small firms in 2009 to make it easier for a firm to dismiss a recently hired employee. This was intended to decrease the risk involved in hiring new people, and so increase firm hiring, particularly of disadvantaged jobseekers. The policy was deemed a success, and in 2011 it was extended to firms of all sizes.

“I used data on every firm and every person in New Zealand to test how the policy affected firm hiring behaviour. The staggered introduction of 90-day trials for firms of different sizes meant I could tell how much firms would have hired if the policy had not been introduced,” said Dr Sin.

Dr Sin found no evidence that trial periods significantly increases firms’ overall hiring.

“In contrast, within the construction and wholesale trade industries, which report high use of trial periods, there is evidence of a 10 percent increase in hiring. However, this evidence is statistically weak, meaning the finding may be driven by pure chance and may not reflect any real-world effect.”

The study discovered no evidence that the policy increased the probability that a new hire by a firm was a beneficiary, recent migrant, youth under 25, Māori or Pasifika under 25, or a recent education leaver. On the other hand, it did not substantially increase short-term hiring or make workers less willing to change jobs.

“The main effect of the policy was a decrease in dismissal costs for firms, while many employees faced increased uncertainty about their job security for three months after being hired,” said Dr Sin.

In 2011, NZIER conducted a study using six months of data after the 2009 policy change that concluded that the policy increased hiring growth by six percentage points. Our results suggest NZIER’s estimated positive policy effect was driven by a combination of an aggregated data sample, the short time period studied and a lack of accounting for the difference in effect on small and large firms of the Global Financial Crisis.

The study The effect of trial periods in employment on firm hiring behaviour by Nathan Chappell and Isabelle Sin was funded by the New Zealand Treasury. An executive summary of the research is attached.