Probation periods: How I see it at the moment
Posted December 10, 2008on:
In net terms I am AGAINST the probation policy being put through today. That puts me in a pretty significant minority among my economics peers, oww well it gives us something to talk about. However, I would also add that I am NOT THAT against it – I am only against it in net terms because of value judgments.
When people make a contract they are agreeing (to set) down things that they are willing to accept given bargaining power etc – but ultimately they will only accept a contract when it makes them better off.
Now if the employer really values the probation period and the employee doesn’t care it should be allowed to happen – and it can in current law. If the employer doesn’t care and the employee does, the employee will take a lower wage to avoid it – all good, and as long as the firm is over the size of 20 employees the new law is cool with that.
However, there is a signaling issue because of a market imperfection – asymmetric information. In this case, the existence of a pure probation option leads to “too many” people getting stuck in these types of contracts, compared to the socially optimal level.
As a result, legislation to decrease the usefulness of probation periods could be socially optimal – however, the magnitude of these costs is the debatable issue.
Fundamentally the signaling issue is that the firm will assume people who do not want a probationary period are “bad employees”, even if in actuality they are just really don’t like the probation period! As a result, some employment relationships will end up with a probationary period, even if both the firm and employee don’t want it! This implies that the use of probation periods will be GREATER than the socially optimal level. Current costs surround the use of such contracts reduced the use of such a clause – which could have increased social welfare.
Given the prevalence of small firms in New Zealand, and the sensitivity of a “signaling equilibrium” to small shocks, a small change in labour law could lead to a significant increase in the number of contracts with probation periods. With my value judgment that the current number of probation contracts used is close to optimal (this is something we can debate 🙂 ) any law that increases the number significantly is no good.
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