Labour Market

Beware the unseen consequences of labour market regulation

Jobs in today’s Britain are dramatically more attractive than even in the recent past. Pay in real terms is two to three times what it was fifty years ago. We work shorter hours and have longer holidays.

Jobs are far less dangerous and far less dirty. We have employment protection, parental and caring leave and a range of mandated benefits. Despite a shaky economy, we have low unemployment and plenty of job vacancies.

But people aren’t happy. They complain about stress at work, about pay which doesn’t meet their requirements or expectations. Our ever-growing graduate workforce complains of being stuck in jobs which don’t use their abilities to the max. Unions point to poor management, to the growth of apparently insecure zero-hours work, to inequality and discrimination.  

What makes for an ideal job? Wrong question. There’s no such thing: everybody has their own personal take. Some are happiest working with other people, others are in their element working alone on a remote nature reserve. Increasing numbers want to work at home, but for others jobs are an escape from crowded households.

Some want a sense of vocation, a feeling that their work has meaning and overtly benefits society; others, though just want to maximise income to benefit families or build up savings for future retirement. Some need a supportive, risk-free environment which makes few demands on them, others want variety, change and adventure – often to be achieved through being self-employed or setting up their own business.

Britain’s labour market, unlike some in Europe, is rather good at offering choice and flexibility. Apart from home working (nearly 20% of us now spend part of our working time at home), millions benefit from flexi-time arrangements, termtime-only working, job shares or condensed hours contracts. The choice of working arrangements has never been greater.

Much of this has come about through private employer initiatives, businesses reacting to the need to attract workers in a tight labour market where employee preferences are increasingly diverse.

However, there are increasing pressures to involve the state in regulating jobs with the goal of making employees happier. 

Examples include: raising the National Living Wage to unprecedented levels and extending it to the youngest workers; introducing a default right to homeworking; a right to disconnect (where employers and fellow employees are forbidden to contact you outside working hours); setting up implicit gender or ethnic quotas for the best-paid jobs; and redefining the status of many self-employed gig economy workers.

The objectives of unions and pressure groups may be for the best, but often the unintended negative consequences of employment interventions are downplayed or misunderstood.

For example, interpretations of equal pay laws focusing on the quasi-Marxist concept of “work of equal value”. At Asda a group of (mainly female) supermarket workers won a famous claim that their work was technically comparable with (mainly male) warehouse workers, ignoring market forces which generated a “compensating differential” for less pleasant working conditions in warehouses.

As a result, supermarkets are now speeding up the replacement of check-out workers with self-service check-outs.

Big increases in the National Living Wage have led employers to cut back on non-pay benefits to employees. Attempts to reduce allegedly ‘bogus’ self-employment arrangements with freelance workers have created a bureaucratic nightmare for the genuine self-employed.

Mandated benefits such as longer parental leave and auto-enrolment in pension schemes have created extra costs, which in competitive conditions eventually get passed on to workers in terms of lower pay than they would otherwise have received. (The considerable expansion of mandates under the Conservatives is a rarely-discussed factor in the stagnation of real wages.)

Many mandates fall most heavily on smaller businesses and those who work in them. Demands for a statutory right to flexible work from day one of employment, for example, may have relatively little effect on the Civil Service, local authorities, and large private sector employers.

For smaller businesses, however – and remember 40% of private sector workers are in businesses with less than 50 workers – this can be challenging. The cost of flexibility for some workers may fall on others who have to cover for them.

It’s not just government labour market interventions which impact employment options. Our housing market, hopelessly distorted by planning restrictions, traps people in places where opportunities are few.

Thus, in the North East there are far more underemployed graduates stuck in non-graduate jobs than in the South East; they cannot move to better jobs because of the difficulty and cost of finding somewhere to live.

The expansion of occupational regulation in the last twenty years – now requiring everybody from racehorse trainers to social workers to estate agents to have government-imposed qualifications – has raised entry barriers and cut off opportunities, especially for those seeking a mid-career change in direction.

Tighter regulation of childcare has raised costs to parents. This has probably deterred many mothers (and quite a few fathers) from working as much as they would like. It has also significantly reduced options for those without qualifications who would like to work with children. The number of registered childminders, for instance, has dropped like a stone.

The Government’s system of student funding has encouraged some students to follow degree paths which don’t lead anywhere.

Meanwhile little funding is available for school leavers to pursue technical apprenticeships which might benefit them (and the economy) to a greater extent. The levy system, which was supposed to help, taxes employers and then requires them to jump through bureaucratic hoops to get funds back for apprenticeships. It has been a comprehensive failure.

Another little-noticed problem is the closing off of opportunities for youngsters to get work experience very early on. Having the chance of part-time work while at school or university translates into better employment outcomes on leaving education. Yet increasing protection of young people and application of minimum wages to lower age groups, plus growing restrictions on internships, has led to far fewer getting early experience of the discipline and pace of work.

This makes entry into the labour market after university more difficult and, in too many cases, more stressful and challenging, than it might otherwise have been.

So government efforts to create good jobs have not been as successful as their advocates hope, and fewer rather than more interventions might seem to be indicated.

Moreover, we need to think about good jobs not only from the viewpoint of the employee but also from the perspective of the taxpayer and the general public.

Ever-growing numbers of jobs in the economy add nothing to output and reduce prospects for productivity growth. The human resource function in large organisations is largely concerned with monitoring employees and ensuring that all employment regulations are enforced – nowadays with added wokery.

In the financial sector, compliance has expanded enormously in the wake of the banking crisis of a decade and a half ago. These jobs are pleasant enough for the employees involved, but they add precious little for the rest of us.

There are also many jobs and working practices in the public sector and regulated industries such as the railways and Royal Mail which are protected by trade unions. Archaic working practices need to be scrapped and businesses opened up to proper competition.

Good jobs are not just those which employees enjoy. They must also be jobs which contribute to the growth of our economy. Improving living standards and happier working lives depend on this, not on more government regulation.


This article was first published on Conservative Home.

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

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