2 February 2021

The Government seems blind to the dangers of excessive regulation

By

Kwasi Kwarteng, the new Business Secretary, has scrapped a review of employment regulation which was under way before he was appointed to his cabinet role.

Under Alok Sharma, his predecessor at BEIS, the department had apparently been considering changes to the 48-hour weekly working limit, holiday pay entitlements and a number of other minor alterations to employment rights. Mr Kwarteng told the House of Commons that he wasn’t interested in “whittling away workers’ rights or trying to have a race to the bottom or trying to reduce wages”. 

It was probably a Cabinet decision, prompted by fears of upsetting ‘Red Wall’ voters, to row back from any suggestion of deregulating the labour market as a way of stimulating employment growth post-Covid – Mr Kwarteng was just the messenger. His own instincts may well lie elsewhere, given he was a co-author of Britannia Unchained, which argued that UK labour law discourages small businesses from risk-taking, and that the government should cut the burden of employment regulation.

Challenged on this by the BBC’s Nick Robinson, Mr Kwarteng blustered that “the context has changed”. He also came out with that old chestnut, which I first heard in the 1990s, that he wanted a “high-skill, high-wage economy”.

Yet Mr Kwarteng knows perfectly well that most employment ‘rights’ are ultimately paid for by workers themselves in terms of lower pay and fewer job opportunities, and many employment rules have no beneficial effects on individual workers, but simply add to costs: that ‘context’ hasn’t changed at all.

Take the requirement for large organisations to report their gender pay gaps, a requirement which was suspended last year because of the pandemic, but has now been quietly reinstated by Equalities Minister Liz Truss, another Britannia Unchained author whose views seem to have mellowed in government.

I’ve looked in detail at these reports, which are available online; indeed, I often set students the exercise of comparing companies with large gender pay gaps and those with small or even negative differentials. It turns out that those with small pay gaps are not systematically better employers than those with large gaps; they are just operating in fields where employment patterns are different.

For a good example, just look at everyone’s current favourite Pharma company, AstraZeneca, which in its last report showed a pay gap of 13.9%. As its (female) Human Resources Vice-President points out, the gap is driven by having more men in senior roles (very largely, she says, as a consequence of relatively few women having a background in STEM subjects) and more women working part-time and not coming forward to apply for senior roles.

These are factors which operate across our economy and society, and individual firms can do little to affect them. AstraZeneca is making an effort through various schemes to encourage women while staying within the spirit of the law, but making little headway.

The requirement to report the gender pay gap is both onerous and does little direct good, but swells the rising tide of anti-big business rhetoric. The inevitable failure of firms to make significant reductions in pay gaps which are largely beyond their control will only encourage ever more intrusive and problematic legislation. These kind of measures often have pernicious unintended consequences too. Less scrupulous businesses with an unflatteringly large pay gap may be tempted to narrow their gender pay gap by simply outsourcing certain low-paid roles predominantly taken by women. 

One particular threat on the horizon is the extension of reporting to cover ethnic pay gaps, which in the current BLM-led climate, will exacerbate tensions and demands for government action. Ethnic pay monitoring, which has been the subject of a recent consultative exercise, presents a whole range of new problems which the Government needs to think long and hard about before any legislation. It is not just something we should drift into as some sort of harmless gesture.

The truth is that pay gaps of various kinds are inevitable in a complex and free society like the UK. It’s also worth bearing in mind that we already have strong legislation on equal pay and discrimination which enables those genuinely wronged to get redress.

However, our current means of seeking redress through Employment Tribunals arguably encourages spurious claims. It has created a massive backlog of cases and led to the appointment of poorly-qualified judges. Our system of administering employment regulation needs changes and simplification (for example, do we need five minimum wage rates when no other country has this many?) which might reduce the pressure on tribunals.

What is worrying is that a Government which no longer believes in deregulation of labour markets is ignoring these problems – and will inevitably drift into imposing yet more rules. Unions, other political parties, legions of quangos, charities and commentators are constantly pressing for such interventions and every time a new ‘problem’ emerges the Government will likely cave into their demands if it has no clear view of the dangers of excessive regulation.

Kwasi Kwarteng and his colleagues claim to believe that private enterprise will lift us out of Covid-induced recession, yet acquiesce in restrictions which will hold businesses back. They are likely to be disappointed.   

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Professor Len Shackleton is an Editorial and Research Fellow at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.