If we want to improve the supply-side we need greater efforts to deregulate the labour market

A key part of promoting supply-side improvements in the UK economy has to be the loosening-up of employment regulation. Although the UK still has a rather freer labour market than some of its competitors, the last few years have seen a considerable extension of employment regulation. The Index of Economic Freedom’s Labour Freedom index fell from 80 in 2009 to 71.2 this year as a range of new restrictions have been placed on employers.

Regulation raises the predictable expense of employing labour: for example, minimum wages, mandated hours and parental leave all raise costs. Perhaps more perniciously, regulation may also increase the risks associated with taking on new people, who may not be up to scratch but can be very difficult to get rid of, or who may take advantage in unpredictable ways of rights to request flexible working, or time for training, or to postpone retirement.

The huge expansion of employment tribunal cases (over 230,000 last year) is something to which employers repeatedly draw attention. They fear financial and reputational costs associated with adverse judgments, time spent in defending cases and resources used in complying with ever-more-onerous procedures – some of them self-imposed as a result of the defensive growth in the number of HR professionals. There is also some evidence that employers settle even when they know they have done nothing wrong, just to be shot of problem employees.

These costs and uncertainties fall heaviest on smaller businesses. The coalition has shown some awareness of this problem and has plans to increase the time before unfair dismissal kicks in from one year of employment to two years. It is also consulting on a number of minor reforms to employment tribunal processes, including a fee for putting in a claim. However analysis of the tribunal caseload suggests that, while welcome, these measures are unlikely to have a major impact.

One problem in relation to employment law, as to much of our regulation, is that a lot of it has roots in Europe. The fear is that attempts to change it may be overturned by the European Court. This may deter faint-hearted politicians from attempting serious deregulation.

But there are many areas of employment regulation where we could make real changes off our own bat. For example the European Commission does not require us to have a national minimum wage, nor to uprate it regularly. We could have regionalised minima, or for that matter no minimum at all. We could abandon national collective bargaining in the public sector. We could place greater restrictions on the ability to call strikes. Less dramatically, we could reduce some of the home-grown bureaucracy associated with taking on new workers, such as the need to photocopy passports for British citizens with many years of continuous employment and residence, or CRB checks for jobs where there is no serious risk to children.

We could also reduce the impact of equality legislation, the area of regulation which employers large and small, public and private, probably fear most. We now have laws against discrimination which encompass gender, race, ethnic status, age, disability, religious or other beliefs (or none), sexual orientation, gender reassignment, pregnancy and maternity.

These areas are protected at European level, so we cannot easily turn our back on them. But we have over-regulated to an extent which is not matched by most of our EU partners. Our own excesses could be cut back without falling foul of treaty obligations.

For starters, we do not need as elaborate and expensive an apparatus as the Equality and Human Rights Commission (employing more than 500 FTE staff and costing £60 million a year) in addition to a Government Equalities Office. Interestingly, EHRC Chair Trevor Phillips has seemed to acknowledge as much in a recent speech.

Neither are we obliged to impose the heavy-handed public sector Equality Duty, which requires expensive monitoring and action plans to eliminate all inequalities affecting all the ‘protected’ groups, a near-impossible objective because reducing some inequalities may entail increasing others (for instance reducing the gender pay gap would increase the pay gap between ethnic groups). The government has been embarrassed by the Fawcett Society’s legal challenge to its budget-making under the Equality Duty, but it is not widely known that this ‘public sector’ duty covers a whole range of institutions which are not officially in the public sector at all, such as universities, some professional bodies, charities and voluntary organisations.

Nor need we award compensation without limit for discrimination claims. Whereas compensation for straight unfair dismissal is capped at around £70k, with discrimination the sky’s the limit. This can produce outcomes unintended by Parliament and seen by the public as inequitable. Last year the biggest disability payout, nearly three-quarters of a million pounds, was for a journalist claiming he was bullied to the extent that stress made him unable to work. This contrasts uneasily with the paltry sums given to serving soldiers losing limbs in their country’s service. Or take last year’s biggest race discrimination compensation: an English banker denied promotion in a French bank. Discrimination can remain illegal, but there is no reason why such claims should not be capped in the same way as unfair dismissal.

The coalition, therefore, needs to be much more ambitious if it wants to make a real impact in turning back the tide of employment regulation which burdens employers, raises costs and arguably deters job creation.

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.

2 thoughts on “If we want to improve the supply-side we need greater efforts to deregulate the labour market”

  1. Posted 20/02/2011 at 01:30 | Permalink
  2. Posted 23/10/2011 at 06:06 | Permalink

    Excellent article. At last a realistic approach to unemployment that is socially minded as well.

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