1980s-style deregulation of the labour market will not help growth or jobs
09 May 2012
The Enterprise and Regulatory Reform Bill outlined in the Queen’s Speech includes some welcome labour market measures, such as support for more family friendly employment. But at the time of writing there were indications of less welcome measures in the pipeline, such as making it easier for firms to dismiss people, which reflect a 1980s labour market style deregulatory agenda to stimulate growth and job generation. One key argument is that employers are discouraged from hiring people by the fear that they will face additional costs if they subsequently need to dismiss them.
The evidence to support this proposition ranges between weak and non-existent. Nor does it address the central problem for employers. It is not the potential cost of getting rid of labour at some unspecified point in the future that matters, but the current and expected demand for the goods and services their firm produces. Measures to promote hire and fire practices are irrelevant.
Firstly, the UK labour market is not over-regulated. As we showed in our submission to the 2011 Autumn Statement, the UK already has one of the most lightly regulated labour markets in the industrialised world according to an index produced by the OECD. The UK scores especially low on ease of dismissal, which is now slightly easier here than in the US. It is much, much harder for employers in China or India to legally sack workers than in the UK. Moreover, any economic gains to international competiveness from the reduction in levels of labour market regulation over the past 20 years were cashed in years ago. The potential gains from going further in this direction are minimal.
Secondly, the private sector has been creating jobs in large numbers whenever economic conditions allow. Between December 2009 and December 2010, private sector employment grew by nearly 460,000. The subsequent fall in economic growth has significantly slowed the rate of job creation. However, even with overall economic growth at close to zero over the past six months, the private sector has still expanded. UK employers show little sign of being held back from hiring by worries over ease of dismissal. Indeed, they have hired much more vigorously in this recovery than they did in the first years of the 1990s and the 1980s recoveries, despite less favourable macro-economic conditions.
Finally, confidence amongst the workforce also matters. Even if relatively few workers are adversely affected by the reforms, there is a danger that they will create an impression that employment in general is being made more insecure. This would not be helpful in the current climate with the clear link between job insecurity and the confidence to consume. The Workplace Employment Relations Survey from 1998 found 60% of workers said they felt secure in their jobs. This figure rose to 67% in 2004 when the UK labour market was at its most buoyant. In contrast,YouGov data for the Good Work Commission in 2011 saw this figure sink to 45%. As demand in the economy will come from private consumption, eroding job security still further will be counter productive.
The key is to ensure high levels of flexibility alongside employment (rather than job) security – a concept developed in some of Europe’s more successful economies called ‘flexicurity’. This approach focuses on giving workers the means of coping with constant change in the labour market, so they can feel confident about their future employability while employers have the flexibility they need.
Of course governments should constantly review both new and current employment legislation to ensure it is fit for purpose, has the intended impact, and is being implemented efficiently and effectively. Small firms in particular must be able to quickly and easily access help to ensure they comply with legislative requirements. There are already review mechanisms in place to ensure this happens and any needed improvements can be introduced quickly and easily.
Overall, the conclusion has to be that making it easier to dismiss will have no significant impact on job generation and is irrelevant to the wider question of how to stimulate growth. Further 1980s style labour market deregulation in the UK offers few gains and risks being counter-productive. The progressive elements in the Bill need to be strengthened and widened to put support for finance for enterprise and investment in the digital and physical infrastructure, the science and technology base, and workforce employability and skills at the centre of a credible growth strategy.