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Stephen  Bevan

Weeding out the 'Idlers' won't raise GDP

Authors: Stephen Bevan Stephen Bevan

14 September 2012

“The British are among the worst idlers in the world. We work among the lowest hours, we retire early and our productivity is poor”.  This is one view of the UK labour market which is gaining ground among a growing number of politicians and think-tanks on the ‘de-regulating’ side of the debate on economic recovery. In their recent book, ‘Britannia Unchained’, the authors argue that employers are held back from creating wealth and new jobs by regulations which prevent them from sacking ‘coasting’ workers. In doing so they are echoing calls in the Beecroft Report that excessive employment regulation is strangling economic growth.

Those of us who look at the evidence on labour market regulation and its impact on employers and the wider economy find it hard to escape the conclusion that this de-regulatory rhetoric is more ‘tub-thumping’ nonsense than serious, evidence-based policy. Luckily, it seems that the Business Secretary Vince Cable (mostly) agrees.

However, today’s announcement by Mr Cable on unfair dismissal still has the smell of playing to the crowd rather than being a serious attempt to align employment regulation with the growth agenda. The maximum £72,000 compensation cap for unfair dismissal is to be reduced dramatically as part of a package of measures designed to remove disincentives from employers looking to take on new staff. The new cap may be set at the employee's annual salary, or another lower figure yet to be decided.

However, we already know that this maximum figure is awarded in only 1 or 2 per cent of cases a year, and that the current median award is only £5,000 to £6,000, with only 6 per cent of cases leading to awards over £30,000. It’s really hard to see how such a technical change in one part of the employment law ‘forest’ is going to miraculously liberate the animal spirits of entrepreneurship.

A central argument of the de-regulators is that growth has stalled because employers are discouraged from hiring people by the fear that they will face additional costs if they subsequently need to dismiss them. Opponents of employment regulation have done a good job of creating the impression that employers are sinking under some of the most onerous, job-destroying red-tape in the developed world. But the evidence is that the UK labour market is not over-regulated. In fact, 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 the ease of dismissal, which is now slightly easier here than in the US. Paradoxically, it is considerably harder for employers in China or India to legally sack workers than in the UK.

The big danger of this kind of measure is that many employees will regard reforms which make dismissal easier as a reason to feel even less secure in their jobs – and insecure workers are not bold consumers. So eroding job security still further will do nothing to stoke the demand-side of the economy, nor will it promote growth. That’s where Mr Cable and his colleagues should be focused.