Wooo! Here comes the regulation bogeyman. Again.

Two-thirds of firms perceive employment regulation to be the biggest threat to labour market competitiveness, says the CBI.

What? Even though just about everyone has more of it than we do, including many of the most competitive economies?

It goes on:

The employment tribunal system is the single biggest deterrent to firms looking to hire, with a 58% increase in claims over the past five years.

Single biggest deterrent? What? More than the weak demand and consistently frightening economic news?

And last time I looked, wasn’t the number of employment tribunal cases falling?

Reviewing the actual evidence, as opposed to the hearsay, the LSE’s John Van Reenen notes:

[T]here is in fact a substantial body of evidence on the economic effects of employment laws. Indeed, it has been one of the most studied areas in economics over the last decade or two.

The bottom line? The conclusion of the vast majority of studies is that there is no significant effect, i.e. tougher EPL [Employment Protection Law] does not increase  unemployment.

In other words, the evidence, as opposed to people’s perceptions, shows, that employment protection is at most a minor factor influencing economic growth and job creation.

Professor Van Reenen has another interesting observation though:

Let me take one study I have been involved in which looks at the case of France where EPL increases very substantially when firms reach 50 employees. French Firms respond to the increase in costs by choosing to remain small – there is a big spike of firms who are just below the threshold at 48-49 employees to avoid the regulation.  This reduces total output as many of these firms would like to grow and employ more people but are deterred from doing so by the regulation, just as Beecroft alleges. But this effect is not huge – very efficient firms will still choose to pay the regulatory “tax” and become large. For example, a 1,000 employee firm is not likely to shed 950 of its workers simply to avoid the regulation.

There is a similar story in other countries. Mario Monti has (correctly in my view) been involved in a drive to reduce the heavy firing costs in Italian firms who are larger than 15 employees. As in my French study, Torrini and Schivaldi found that firms just below the 15 cut-off are much less likely to grow. But again, in aggregate the effects are relatively modest and cannot cause large changes in employment or output.

So even where regulation is high, it makes very little difference to firms’ ability to grow and employ people. But people think it does, so many of them stay cowering below the 50 employee threshold, lest the demons of employment regulation get them. It’s not the regulation itself but the fear of it that stops companies from growing.

Something similar is happening here. Although the UK is a regulation-lite economy, the way that employment law cases are reported gives the impression that firms are regularly being sued for huge amounts. The crazy claims get massive publicity while the paltry awards barely rate a mention anywhere outside the employment law and HR press.

Thankfully, most of us will never be the victims of violent crime but watch Crimewatch too often and you’ll find yourself scared to go out. Likewise, most employees and firms will never see an employment tribunal but the disproportionate publicity given to the most lurid cases creates the myth of greedy workers “suing firms out of existence“.

Organisations like the CBI and IoD regularly release statements about employment regulation strangling business. If you do that often enough, is it any surprise that, when you then survey your members, they tell you that employment regulation is strangling their businesses?

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6 Responses to Wooo! Here comes the regulation bogeyman. Again.

  1. Pingback: Wooo! Here comes the regulation bogeyman. Again. - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Annabel Kaye says:

    It is extremely rare we deal with an employer who wants something that really can’t be done.

    It is often as much about how you do things as what you do. Since how you do things affects employee engagement and motivation as well as the law, it is difficult to imagine how an unfettered right to be as nasty or irrational as you like can be good for business.

  3. B.O. Locks says:

    In the French case the regulation that encourages firms to stay small may be a very good thing in terns of jobs. When firms get big, either via organic growth or via a merger/acquisition, the “efficiencies” that size is said to produce usually manifest themselves as redundancies. Size and growth efficiencies are usually good for the directors whose bonuses will balloon, and may be good for the shareholders, depending on how active they. are but these efficiencies invariably are very bad for a sizeable chunk of the lower tier workforce.

    As always, it is always a good idea to evaluate proposals in terms of who will benefit. Evaluations based on this notion will usually reveal that it is the directors and capitalist class that are the beneficiaries, usually at the expense of the labouring class (ie lower and middle ranking employees). Beecroft’s proposals, supported by the IoD and CBI, are a case in point. The real agenda of their sack at will proposal is not to create new jobs. Their real agenda is to sack more expensive employees and to replace them with cheaper ones. Result? Increased profits and enhanced bonuses! Triple G & Ts all round chaps!

  4. As stated previously both here and elsewhere, it’s nigh on impossible to successfully sue for unfair dismissal should the correct management procedures have been carried out and the decision to dismiss be reasonable to the manager firing the employee. What the CBI and Beecroft are saying, effectively, is that they don’t want to bother managing their workforce. Which, one would assume, is as harmful to businesses as it is to their employees.

  5. Simon Alford says:

    Sensible article , thank you.

  6. Dipper says:

    Camilla Cavendish on Any Questions said that according to employers to whom she had spoken the issue is not employment protection its the anti-discrimination laws. Last week’s AQ is available as a podcast and Camilla Cavendish is as always well worth listening to.

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