Would repatriating powers over employment regulation make much of a difference?

Many British critics of the EU have argued for making significant repatriation of government powers over employment regulation a key element in David Cameron’s renegotiation of the relationship with our European neighbours. Last week it was leaked that the two areas which Mr Cameron is focusing on are the Agency Workers Regulations (which extends to agency workers many of the employment rights accruing to permanent employees) and the Working Time Directive (which places limits on the maximum hours employees may work, albeit with some opt-outs still possible).

It’s unsurprising that these two areas have been singled out. Open Europe calculated in 2011 that two thirds of the costs of EU-driven employment regulation were associated with these areas, and the Fresh Start Project has put repeal of the relevant legislation at the centre of its renegotiation demands.

It may certainly be possible, while staying in the EU, to negotiate to achieve opt-outs from these aspects of European employment law – Germany and some other member countries are believed to be sympathetic – although this still leaves open the possibility of ‘backdoor re-regulation’ through other means such as the creation of new health and safety obligations and changes to competition and company law.

Of course, these obligations are currently part of British law and would still have to be unpicked by Parliament if the rest of the EU acquiesced. Even if this could be done quickly (not a foregone conclusion, given likely domestic opposition), it is simplistic to assume, as the Fresh Start Project seems to do, that repeal would free up significant resources, at least in the short term. For many costs arise through having to develop new procedures (for example, to record working time), taking on extra workers, altering contracts and shift arrangements and so forth. Companies would find it costly to reverse such changes, and few might initially choose to do so given that it would mean disruption and would cause friction with employees.

It is also generally the case that the costs of regulation are passed on to employees in the form of lower wages and to customers in the form of higher prices, leading to wider changes in spending and labour supply, so the effects of repeal are never symmetric with those of imposition.

Yes, over time new entrants might take advantage of relaxed regulation, and existing firms might alter their practices, but such innovations could take years to emerge. They could be overtaken by other labour market changes and new patterns of work, for example the spread of self-employment and working from home. These changes, incidentally, may already have mitigated some of the original costs of European regulation.

But in any case, given the continuing taste of our domestic politicians for regulation, would a domestic review process really lead to significant change? I think Lord Mandelson was probably correct when, as a European Commissioner, he claimed that “a greater part of the burden on business comes from national measures which go beyond what is required by European legislation”. It is more than possible that European Directives complained about in public were secretly welcomed by UK administrations. Some certainly seem to have been ‘gold-plated’: the transposing legislation has added to Directive requirements in various ways, so that regulation goes beyond what is mandated by the EU.

Gold-plating occurs when the government extends the scope of its implementing legislation beyond what is required by a Directive, when it fails to take advantage of exemptions allowed by a Directive, when it introduces penalties for employers that go beyond the penalties required by a Directive or when it introduces its transposing legislation earlier than required.

One example is the Working Time Directive’s requirement for four weeks annual holiday; since the Directive came into force, UK governments have increased this to 5.6 weeks – a provision which, of course, would be politically difficult to reverse.

In any case the recent imposition of pension auto-enrolment, restrictions on zero-hours contracts, compulsory pay audits, George Osborne’s new ‘National Living Wage’ and his planned training levy on firms – none of which are European obligations – hardly suggests that UK politicians are chomping at the bit to reduce employment regulation.

So although recovery of domestic powers over employment law may be a necessary condition for major deregulation of the labour market, it is far indeed from being sufficient. Those arguing for greater labour market freedom need to change the mindset of our own politicians – and indeed the current beliefs of much of the general public – rather than blaming everything on Brussels.

Prof J.R. Shackleton is the IEA’s Editorial and Research Fellow, and a Professor of Economics at the University of Buckingham.