Labour Market

Political consensus to increase employment regulation risks undermining the economy

New IEA report released on the problems with overzealous employment regulation

Whichever party wins the General Election this week, UK workers are almost certain to face increasing employment regulation.

Whether it’s the Conservative Party’s extended care leave and restrictions on zero-hours arrangements, or the Labour Party’s outright ban on non-traditional contracts, a hiked-up National Living Wage, maximum pay ratios and increased union powers, political intervention in labour markets is on the rise.

A new report from the Institute of Economic Affairs charts the growth of government intervention in labour markets over the past twenty years, the problems with its continual rise, and recommends several options for deregulation which would benefit the UK economy.

Much employment regulation is costly to administer and poorly targeted. Although politicians claim that the costs fall on the broad shoulders of profitable businesses, in reality much of the cost is passed on to consumers and workers themselves. Excessive regulation slows the growth of productivity, and is an important reason why growth in real wages has been slow for much of the working population. In the last seven years alone, we have had the National Living Wage, pension auto-enrolment, the apprenticeship levy, implementation of the Agency Workers Directive, levies on employing non-EU workers, to name a handful.

There are several problems with the UK labour market which necessitate deregulation: high levels of youth unemployment; poor productivity growth; weak levels of education and skills; large differences in employment rates between regions and ethnic groups; and the sluggish growth of real wages.

Brexit offers the opportunity for the wholesale review not only of legislation coming from the EU but also of domestic regulation.

Options for deregulation:

  • The introduction of ‘sunset clauses’. A major review of employment law could then take place, forcing a strong case to be be put forward to retain laws which involve significant costs for little benefit. This would present the opportunity to spell out how regulations impact wages, employment and living standards.

  • The exemption of small firms from some regulations would help the growth of SMEs.

  • Decentralisation via devolving the power of minimum wage setting and the apprenticeship levy to Scotland, Northern Ireland and Wales would stimulate regulatory competition.

  • A similar moratorium to the Coalition’s ‘one-in-one-out’ principle. This would do nothing to reverse the damaging effects of past legislation, but would stop knee-jerk and ill-considered legislation which sometimes comes about following media scandals.

Problems with employment regulation

  • Whilst regulations may boost incomes and working conditions for some groups of workers, it is often at the expense of other groups.

  • It inhibits structural change, slows productivity and does little to boost economic growth.

  • It erodes personal freedom and choice in subtle ways by contributing to a climate where individuals seek support from the state rather than their own efforts, and employers need permissions and exemptions before they undertake new enterprises.

  • It stigmatises non-standard forms of employment.

  • Costs tend to fall largely on consumers and workers rather than businesses and shareholders.

  • Regulation creates vested interests which fight to maintain their privileges.

Commenting on the report, its author Professor Len Shackleton, said:

“The UK labour market has been working well, with unemployment at its lowest and employment at its highest for decades. But both major parties want to increase employment regulation in various ways. We already have a much more highly-regulated labour market than was the case ten years ago, with the national living wage, pension auto-enrolment, the apprenticeship levy and increasingly irksome and costly procedures for recruiting non-EU workers.

“At a time when European countries such as France and Spain are trying to cut back on regulation, and we face all the uncertainties of Brexit, we should not be imposing yet more restrictions on job creation.”

Notes to editors:

For media enquiries please contact Stephanie Lis, Director of Communications: [email protected] or 07766 221 268

To download the report, Working to Rule – The Damaging Economics of UK Employment Regulation, please click here.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems and seeks to provide analysis in order to improve the public understanding of economics.

The IEA is a registered educational charity and independent of all political parties.