Regulation is deterring employers from taking on new workers

The labour market statistics released today do not make the greatest reading. UK unemployment rose by 129,000 in the three months to September, with youth unemployment rising above a million.

As always, looking below the headline figures reveals a complex and sometimes puzzling picture which is by no means all gloom and doom. Pay pressures are easing, with average earnings rising 0.4 percentage points less than in the previous quarter. The number of private sector jobs continues to rise even while public sector jobs are cut. Total hours worked rose over the last quarter, as did average hours worked per worker – suggesting that the private sector demand for labour is being maintained, but with employers preferring to offer longer hours rather than take on more workers. Given the uncertainty of the current economic environment, and the substantial fixed costs associated with taking on new staff, this is unsurprising. The vacancies picture also supports the view that some demand buoyancy still exists – the number of registered vacancies actually rose slightly over the last three months and stands higher than it was this time last year.

This is evidence of some continuing mismatch between jobseekers and job vacancies. Another is the finding that the number of UK nationals in employment fell by 280,000 over the last year, while the number of employed non-UK nationals rose by 147,000 – indicating that significant numbers of new jobs are probably still going to immigrants despite rising domestic unemployment.

Perhaps surprisingly in light of the endless talk about ‘the cuts’, the number of redundancies, at 147,000 between June and September, was down by 7,000 from the previous quarter and was only marginally higher than a year ago – which suggests that many of the job cuts in the public sector are being dealt with through natural wastage rather than existing public sector workers being sacked. This is understandable in view of the financial (and human) costs of redundancies, but is not necessarily the best policy if longer-term efficiency is the goal.

The youth unemployment figure has attracted most attention, with much talk of a ‘lost generation’. The high level of unemployment amongst 16-24 year olds is a real concern, though the figure exaggerates slightly as it includes 286,000 full-time students who were looking for part-time work over the summer vacation. It’s also worth noting that this age group’s unemployment rate, at 21.9%, is based on those economically active. Given the huge rise in post-school education, this proportion has been falling rapidly. It is now down to only 63.4% of the age group – and will drop further as the effective school leaving age is raised to 18 over the next four years.

The UK’s youth unemployment rate is also way below the levels of youth unemployment in Eurozone countries such as Spain and Italy. It is nevertheless a real problem. In periods of economic uncertainty, employers may naturally be reluctant to take on young people whose ability and degree of commitment are an unknown factor. But labour market regulation surely exacerbates this tendency. Minimum wage legislation almost certainly deters some employers from taking on more workers, as does employment protection legislation, some types of discrimination law, the parental leave entitlement and (particularly significant for this age group) the Agency Workers’ Directive and the right to request time off for training. The Coalition’s demonisation of work internships hasn’t helped either.

It is to these areas that the government should look if it wants to see the employment opportunities of young (and older) people increase. Instead I fear that they are likely to find extra funds from somewhere for poor quality apprenticeships of the kind Alison Wolf has criticised, or expensive ‘work experience’ schemes which have had little success in the past.

More generally, the disappointing unemployment figures should not panic the government into abandoning its austerity plans. If the market gets the impression that we are no longer serious about getting the deficit down, the consequences for the labour market in the medium term will be far worse than those we are currently facing.

Len Shackleton is an Economics Fellow at the Institute of Economic Affairs 

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.

1 thought on “Regulation is deterring employers from taking on new workers”

  1. Posted 30/11/2011 at 15:20 | Permalink

    I would be interested to learn which anti-discrimination legislation the author believes is acting as a disincentive to employers as regards taking on new employees. The Disability Discrimination Act is, for example there to prevent employers and service providers from discriminating against people with disabilities. Even with the legislation in force the number of disabled people, of working age who are unemployed is still extremely high. Remove the DDA and the situation worsens. As regards the Minimum Wage this prevents employers from paying poverty wages. Remove the Minimum Wage and the state ends up (through welfare payments) subsidising employers who pay poor wages. Where is the evidence for the claim that regulation is acting as a disincentive to employers? I am sure that governments need to carefully consider the pros and cons of regulation and (in some cases) amend or repeal certain measures. However the perspective that regulation is (always) bad and deregulation good is a falacy.

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