Labour Market

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The young, those nearing retirement age and the unemployed suffer from the strict labour market regulation that exists in most of the European Union according to a new study published today.

The study, published in Economic Affairs*, and edited by Len Shackleton, Dean of Westminster Business School, examines different forms of labour market regulation, such as statutory unemployment pay, notice periods and minimum wages and contains a strong message for politicians about the future design of labour market policies. It found that young people with little employment experience, older people nearing retirement age and the already unemployed become “outsiders” to the labour market who suffer whilst “insiders”, those with secure jobs, gain.

The major continental EU countries Spain, France, Italy and Germany have amongst the most heavily regulated labour markets in the OECD. The US, the UK and Ireland are amongst the least regulated. Regulation causes immense damage to employment prospects. In Germany, Italy and Spain, for example, between 40% and 60% of people who are unemployed have been out of work for more than a year – comparable figures for the UK and US are 23% and 12% respectively. In France, only a third of young people aged between 20 and 24 are in work, compared with over two thirds in the UK. By analysing research that compares workers at a company-by-company level, the study shows even more clearly how young workers are shut out of the labour market. In otherwise identical firms in retailing 50% of UK workers were under 25 compared with only 35.5% of workers in France. In both motor vehicles and retailing in France, the proportion of workers who have less than one year’s experience was negligible. In heavily regulated labour markets it is very difficult to get on the first rung of the job ladder.

Overall unemployment is roughly double the UK level in each of Germany, France and Spain but, more worryingly, the effect is concentrated on particular groups. Insofar as labour market regulation helps to improve working conditions at all, it only does so at the expense of these “outsider groups”: the young, the unemployed, the inexperienced and those nearing retirement age.

The long run effects of strict labour market regulation on general economic growth are also serious. In the words of Edward Biehanzl, one of the authors of the study, “It is the dynamic effect of employment protection regulation that is the biggest problem in the long run. Regulation reduces the churn of workers that is necessary to enable industry to respond to changing conditions. The job losses that employment regulation tries to prevent are essential if new industries are going to expand and economies are going to grow”.

The study also suggests that where governments do intervene in labour markets they should do so in a decentralised way and in a way that sends the right incentives to workers. This is precisely the opposite of the approach taken in the EU. In the US different states can take different approaches. Good policies are copied rapidly and bad policies are dropped. Several states have successful Self-Employment Assistance programmes that pay a self-employment allowance instead of unemployment benefit so that the unemployed can engage full time in setting up their own business. However, in the European Union, employment regulation and active labour market interventions are becoming less market orientated and more centralised in Brussels.

Read the full study here.