6 June 2017

British firms need less red tape. They’re getting more

By Len Shackleton

Whoever wins on Thursday, Britain is going to get increased employment regulation. It could be via Theresa May’s proposals for extended care leave, restrictions on zero-hours arrangements, putting workers on boards, forcing firms to report on ethnic pay gaps and maintaining European employment regulations post-Brexit.

Or it could be Jeremy Corbyn’s outright ban on non-traditional contracts, a hiked-up National Living Wage, the imposition of maximum pay ratios and increases in union powers. And should we end up with a new Coalition, the SNP, Lib Dems and other parties all have similar proposals up their sleeves.

Most politicians seem to believe that the burden of new employment laws fall on businesses, which can and should bear the costs of improving workers’ conditions.

But regulation is, effectively, a tax on jobs. As with more explicit payroll taxes, it does not come out of employer profits – except in the very short run. Faced with a mandatory requirement such as pension contributions or extended parental leave, firms react by offloading the cost of the mandate.

If a firm is in a strong market position, the costs can be passed on to consumers, via higher prices. More frequently, they fall on workers, through reductions in the rate of pay growth, or the worsening of other employment conditions. Failing this, employment falls as businesses automate production processes, or move jobs abroad.

Yes, regulation certainly benefits some groups of workers. But this is often at the expense of other, perhaps more vulnerable people. Boosting minimum wages, for example, benefits many students and secondary workers, but makes finding a job more difficult for some ethnic minority workers, disabled people and other disadvantaged groups.

And there is a more general problem, too. Regulation inhibits structural change, causing productivity – and thus real wages – to grow more slowly. It erodes choice and personal freedom, for instance to enter jobs where unnecessary occupational licensing restricts entry. It builds a dependency culture in which individuals expect the state to resolve all work problems, and where employers need permissions and exemptions to engage in innovation.

In new research for the Institute of Economic Affairs, published today, I chart the growth of government intervention in labour markets over the past 20 years. What I found was that there are nearly 100 different areas where employment law constrains businesses and employees.

In the current political climate, this is a hopelessly unrealistic aspiration, but I believe – I know – that this body of legislation should be radically filleted.

When it comes to the precise areas that should be kept, everyone will have their preferences. But for me, the most important aspects of employment regulation – the necessary core – would be as follows.

First, controls on the hours and types of work undertaken by children and young people.

Second, restrictions on excessive hours worked in transport and health care, where there are potential dangers to the public.

Third, a cheap mechanism for ensuring employers meet their contractual obligations to employees, such as paying wages on time.

Fourth, instead of today’s lumbering employment protection rules, we should have a no-fault dismissal procedure with some notice and compensation, as recommended by Adrian Beecroft a while back.

Finally, it is difficult to avoid some anti-discrimination legislation – though I would argue that this should be much more tightly drawn than at present, with limits on compensation (there are, under EU law, currently no such limits).

Beyond this, I’m not at all sure what we need. Yes, a case can always be made for every regulation – but our politicians have got used to bigging up the purported benefits of intervention without thinking through its knock-on effects.

They –  and we – ought to think again, and allow employers and employees more scope to design freely negotiated contracts.

Proposals to deregulate employment are unpopular largely because they are inevitably portrayed as benefiting business interests and boosting profits at the expense of the worker.

But in a competitive environment, excess profits don’t last long. Of more importance are the wider long-term benefits flowing from the liberalisation of labour markets: greater economic opportunities, more innovation, higher employment, productivity gains, sustainable increases in real wages.

In the face of the uncertainties of Brexit, we don’t need more employment regulation – we need less.

Len Shackleton is Professor of Economics at the University of Buckingham and Research and Editorial Fellow at the Institute of Economic Affairs. His book 'Working to Rule: The Damaging Economics of UK Employment Regulation' is published today by the IEA