Labour Market

Relax employment regulation to drive the economic recovery, says new IEA report

– The labour market faces much higher unemployment following the Covid-19 lockdown; 

– Experience of previous recessions suggests a recovery in employment will lag behind a recovery in GDP; 

– There will not be a return to “normal” activity for some time, if ever, in many sectors; 

– The pattern of labour demand can never be frozen by government fiat: direct government interventions to “create jobs” are costly and not the way forward; 

– Appointing 13,000 work coaches to assist in CV writing and interview techniques sounds like a patronising and bureaucratic approach to the problem: it won’t help the many bright young people who have lost jobs;   

– We need to encourage the creation of new jobs, rather than holding onto old ones or keeping old businesses on artificial life support; 

– This means relaxing regulation and allowing private enterprise to drive the recovery. 

How to create new jobsnew briefing paper from the Institute of Economic Affairs authored by Editorial and Research Fellow Professor Len Shackleton, outlines the shape of the UK labour market before and during the pandemic, analyses government schemes to date, and makes the case for deregulation to boost employment as we emerge from this crisis.  

Prior to the outbreak of Covid-19 pandemic the UK labour market was in its best shape for decades. Seven months later and employment has fallen by three-quarters of a million, large numbers of workers have withdrawn from the workforce, and unemployment is expected to rise sharply in the coming weeks. 

Measures such as the Coronavirus Job Retention Scheme and the Self-employment Income Support Scheme were the right medicine at the time, but governments cannot keep businesses on life support indefinitely. The new Job Support Scheme will do little to help. 

The pattern of labour demand can never be frozen by government fiat: jobs disappear all the time, even without pandemics. Over the course of 2017 2,229,555 jobs were lost as businesses closed or reduced headcount – but 2,648,989 new jobs were generated. This is the creative power of private enterprise at work.  

We cannot therefore hold onto old jobs and keep old businesses on artificial life support. Direct government interventions to “create jobs” are costly, rarely successful in generating multiplier effects, and are not the way forward.

Nor can the current crisis be an excuse for the permanent expansion of the state accompanied by increased taxation, which would itself damage the recovery and be a permanent drag on the economy.    

The briefing paper argues that we must restore and enhance the conditions under which job creation can be maximised, which means allowing markets for goods and services to operate freely. 

Deregulation of land use planning is welcome, but Professor Shackleton makes the case for wider liberalisation, including a radical rethinking of employment law. Employment regulation is in effect a tax on jobs – the burden falling largely on workers in terms of reduced pay and employment opportunities rather than on company profits.  

Key elements in boosting economic recovery could include: 

– Scrapping much occupational licensing; 

– The reform of minimum wages; 

– Ending the apprenticeship levy; and 

– Unpicking many other types of employment regulation. 

Ultimately, what is needed is a radical change in thinking and the courage to “go against the mindset that sees the world of work as riddled with ‘market failures’ that requires the state to be forever peering over the employer’s shoulder to direct and control”.  

Professor Len Shackleton, IEA Editorial and Research Fellow, said: 

If it is not careful, the government will be sucked into massive spending on schemes which will add little to employment but will lead to still higher government debt and/or taxes. What is needed is not a Roosevelt-style  New Deal but to build on the policies which have brought Britain success in the past; lower taxes and fewer regulations.

“As soon as is safely possible, the government should relax the many restrictions which currently constrain economic activity. And meanwhile it should consider a serious rethink of the ever-growing number of  rules and regulations which have inhibited productivity improvement and economic growth in the last decade and which threaten job creation in this very difficult environment.”


Notes to Editors 

For media enquiries please contact Annabel Denham, Director of Communications, 07540770774 

Professor Len Shackleton is available for further comment. 

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