Employment protection – Are Liam Fox’s claims intellectually sustainable?

There’s a hint of desperation in this piece from Jeremy Warner. We have to make it easier for firms to fire people, he says, “everything else we’ve tried has failed to stimulate economic growth.” That’s the sort of thing people say when they go to see faith healers. We’ve tried all the usual drugs and treatments, so a visit to the Reverend Mumbo T. Jumbo has to be worth a go.

The article was written in support of Liam Fox, who, last week, claimed that weakening employment protection legislation would stimulate economic growth.

To restore Britain’s competitiveness we must begin by deregulating the labour market. Political objections must be overridden. It is too difficult to hire and fire and too expensive to take on new employees. It is intellectually unsustainable to believe that workplace rights should remain untouchable while output and employment are clearly cyclical.

If anything is ‘intellectually unsustainable’ it’s Dr Fox’s argument. There is no evidence that employment law is holding our economy back. Countries with a lot more employment protection, from the law and from collective agreements, continue to outperform the UK on a number of measures. Many countries manage to be more competitive than the UK while still having tougher employment laws. Ann Pettifor recently compared the UK with other North European economies, Germany the Netherlands and Sweden, all of which have more higher levels of employment protection than the UK. She concluded that, on a number of measures, despite its relatively deregulated labour market, the UK performed worst.

There is no economic evidence from the OECD’s statistics to support the thesis that it is excessive employment protection which is damaging the UK’s below-par economic performance.

The OECD figures tend to support a stronger correlation between low employment protection and the UK’s relatively poor economic performance.

That last point is counter-intuitive but it’s not as crazy as it sounds. This research, quoted here by Chris Dillow, suggests that, where employment laws are very restrictive, there might indeed be some economic benefit to be gained by reducing them. But where employment protection is light, reducing it further will have little effect and might even make things worse. Removing employment protection therefore produces an inverse U curve, with much to be gained at the highly regulated end and much to be lost at the other end. Given that the UK is at the deregulated end of the scale, it is difficult to see how further reductions in employment regulation would do much to improve productivity, employment levels and economic growth.

Employment Protection in 2008 in OECD and selected non-OECD countries

Scale from 0 (least stringent) to 6 (most restrictive)

Ah, but look at the US, says Jeremy Warner. They have less regulation than us and their economy is storming ahead. OK, but that’s one country set against data from four or five others that show the opposite. Many will also argue that it’s President Obama’s stimulus package that has increased US employment, not its deregulated labour market.

There is little evidence, then, that the UK’s already light employment laws are discouraging employers from hiring workers or that removing employment protection would have much effect on economic growth. However, thanks to imminent changes in employment regulation, we may be able to conduct a little experiment over the next few months.

From 6 April, the qualifying period for unfair dismissal will increase to two years. If making it easier to fire employees really is important to employers, it would make sense for them to delay any new recruitment until after 6 April, when the new employees will have fewer employment rights. As Laurie Anstis says, if Liam Fox, Jeremy Warner and others are right, we should see a spike in recruitment after this date, as the “greater confidence” that comes from being able to sack people more easily encourages employers to hire.

If, however, firms are more interested in just getting people through the door to meet increased demand or to replace lost talent, then the fact that people have less protection after 6 April will matter little in the grand scheme of things. I don’t know anyone who is hanging fire on recruitment until the law changes but I may simply be talking to the wrong people.

We shall see.

Updates: Interesting discussion on this subject at XpertHR. Simon Caulkin, writing in the FT, thinks it’s a silly argument too:

If employees are feeling helpless and worried about their jobs, that is what they are focused on, not customers or quality. Fear makes people stupid.

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7 Responses to Employment protection – Are Liam Fox’s claims intellectually sustainable?

  1. Pingback: Employment protection – Are Liam Fox’s claims intellectually sustainable? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. blueskypr says:

    Interesting post and as an owner of a small business I can tell you that the new legislation won’t ( and shouldn’t ) make any difference. The law already allows for organisations to fire people if they are under performing, dishonest or incapable of doing the job for which they were employed – the key is making sure that companies use the right process. All this legislation will do is make it easier for employers to be lazy about robust hiring practices and employment policies.

  3. needs2cash says:

    Attempting to protect jobs with legislation slows employment until more companies go out of business under the yoke of regulations. For the same reason fewer wealth creators emerge.

    Value-adding work – not jobs – is the key.

    Instead of attempting to justify another stimulus for the UK using the US example, why not consider the value of “at will employment” supported by the inherent strength of the US dollar?

    The strength of the US dollar keeps borrowing costs lower for Americans than can British sterling for the British.

    All we Brits can now do, after years of socialists buying votes or equalizing outcomes, is reduce borrowing and add value faster through our work.

    Provided your work adds value your will not be fired.

    John

    PS: Imagine what it would be like if we Brits had not reformed our economy (with a new emphasis on value-adding work) under Maggie Thatcher’s leadership. Greece and several other European countries are now unable to earn their way in this world because they did not have their own reforming leaders in the 1980’s. Instead, post-1986, their politicians chose to live off the easy credit made available by their Euro-based credit-ratings.

    • Rick says:

      John,

      What evidence is there that employment regulation slows employment? It hasn’t done so in Germany, Netherlands, Sweden, Finland.

      The strength of the US dollar has more to do with it being a reserve currency backed by the most powerful state on the planet, than the US lack of labour regulation.

      Lots of countries that didn’t have Maggie Thatcher, or the Thatcher-inspired levels of deregulation, are more prosperous and competitive than we are.

      There is no evidence that further deregulation of the labour market will stimulate growth and employment.

      As for socialists buying votes, show me a successful political party anywhere in the democratic world which hasn’t bought votes.

  4. Dipper says:

    These arguments are only ever put one-way; from the employers perspective, as though the nature of labour laws makes no difference to the supply of skilled labour.

    Why would you spend years acquiring skills just so you can be fired on the whim of a boss? Industries with more employee protection are more likely to attract higher-skill employees, as the employees know their investment in education and training will be more valued.

  5. Pingback: Structural problems and incentives, home and away « lwceconbus

  6. Pingback: UKIP’s rise is a triumph for the pro-establishment ruling class | Liberal Conspiracy

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