House of Commons - Trade and Industry

Select Committee on Trade and Industry Seventh Report

2 Labour market flexibility and employment regulation

4. Ideas about labour market flexibility, and the role of employment regulation in relation to this, have proved controversial in the UK. For some, flexible labour markets seem synonymous with a diminution of employment rights and a 'hire-and-fire' culture amongst employers, and they look to regulatory intervention as a bulwark against this. On the other hand, employment regulation is often cited as a burden on business, steadily increasing, and threatening profitability and future investment. Both positions ignore the complexity of the issues and we agree that: "Too often the debate about reforming labour markets has been sidelined into a supposed choice between a US-style deregulated labour market and the European Social Model."[1]

5. For its part, the Government has tried to reconcile these apparently dichotomous positions. On the one hand it has stressed the importance of maintaining, and even enhancing, the UK's flexible labour market. But on the other, it has stressed that this does not involve "putting efficiency before the primacy of human values".[2] It argues that "[a] flexible and efficient labour market, combined with a stable macroeconomic environment, implies an economy that is more competitive and productive, and which provides greater fairness. It also means an economy that is better able to respond to economic change".[3]

6. In its written evidence, the Government reiterated that it aims to achieve a labour market characterised by full employment, diversity and choice, and high productivity.[4] Specifically:

— Full Employment: It expresses concern that, despite high employment rates, there are concentrated pockets of unemployment in certain areas and amongst certain social groups.

— Diversity and Choice: It comments that the employment rates of female and older workers are improved if there is greater flexibility over hours worked. Greater skills also enhance choice in the labour market.

— High Productivity: It notes that higher skills help improve productivity. This is also improved when there is a high degree of commitment between employers and employees.

7. These aims are very much in line with the Lisbon Strategy, agreed by the European Council in 2000 with the aim of making the European Union "the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion".[5] In pursuit of this, the Lisbon Strategy, and the subsequent policy documents that it has generated, promote greater flexibility in the labour market alongside a commitment to promoting social cohesion.[6] However, as will be discussed in subsequent chapters, not all of the regulations emanating from Europe would appear to be entirely consistent with this model.

8. Whilst the aim may be to reconcile flexibility with social objectives, the general impression given to us by business organisations was that the balance is in danger of being lost and that the pursuit of social objectives via labour market regulation has gone too far and is now impinging on competitiveness. The CBI stressed that the UK is still a good place for businesses to operate, but less so than it was five years ago, and they were concerned that the situation would deteriorate further.[7] The reason for this was the greater regulatory burden that business was being forced to operate under, of which employment regulation was the most onerous element. The EEF cited evidence that suggested that the burden of regulation was becoming a disincentive to continued investment in the UK. The BCC and the FSB had similar concerns, stressing in particular, the disproportionate burden that regulation placed on small businesses.

9. The CBI emphasised the role that labour market flexibility plays in the UK's continued economic success. For the CBI, labour market flexibility is both a good in itself but also a compensating factor for areas in which the UK is less strong, such as skills or education, or even transport infrastructure:

"businesses in Britain rely upon the flexibility of how they can recruit and utilise labour, working hours, work organisation, to make up for the fact that skill levels are not as high as they would be in France and Germany. France and Germany have the benefit of higher skills levels. They may have more flexibility in terms of skills utilisation, but they lose that advantage because of maybe too high wage rates, too high restrictions on labour market participation. You can see the net result. We are broadly as competitive as those countries… we are not prepared to lose what we have while we are busy making up for our deficiencies in the areas that we are not competitive in."[8]

10. The BCC took a similar line, claiming that "the burden of regulation continues to be of great concern to UK businesses as it represents a significant erosion of [UK] competitive advantage".[9] They maintain a 'burdens barometer' which they argue reveals that, between 1998 and June 2004, regulatory costs increased by £30 billion, with £12.68 billion deriving from employment regulation.[10] Consequently they claim that "the burden of red tape and regulation is the biggest single problem" facing British business.[11]

11. The paradox is that the UK retains a comparatively unregulated labour market. It is certainly true that the UK's relative advantage in this area may have decreased slightly, but this is largely due to deregulatory measures taken elsewhere. There has been a degree of reregulation of the labour market under the Labour Government, but there can be little doubt that it remains considerably less regulated than most comparable countries:[12] in the OECD's index of labour market flexibility, the UK's score has moved from 1.0 in the late 1990s to 1.1 in 2003. This is against an OECD average of over 2.0.[13] And yet the business organisations give the impression of a large and expanding burden of regulation that constrains their freedom to use their resources as they would wish, and which diverts scarce management time to compliance matters and away from more productive activity. It seems that the pace of change can go some way towards accounting for this perception: the EEF thought that the negative perception was the result of the fact that employers have had to come to terms with a steady stream of regulation, whereas firms operating in more regulated economies were accustomed to that environment.[14] The FSB emphasised how difficult it is for small companies without the benefit of a personnel department to monitor and oversee implementation of new regulations.

12. It has, however, proved hard to quantify the extent to which the regulatory burden genuinely does divert scarce resources. One study, conducted for the DTI found that the perception of regulatory burden was general and not, in most instances, based on first-hand negative experiences. In the study, "the common theme…was the view that flexibility was being restricted by, for example, the existence of maternity rights…But deeper inquiry showed that these concerns tended to relate to beliefs about business in general rather than concrete experience in the firm itself."[15] This would seem to be supported by some of the research that Professor Keith Ewing[16] has conducted on behalf of Amicus-GPM Section. Whilst some employers felt that there was an excessive regulatory burden, many small and medium-sized firms were not concerned about the level of employment regulation.[17] Work Foundation research has found that the high-performing companies were relatively untroubled by regulation and did not regard it as a significant constraint on their operations. At the most, it was regarded as "a bit of a hygiene factor".[18]

13. The TUC suggested that the business concern with regulation was symptom of a continued preoccupation with the 'low road' approach to competitiveness, based on cheap labour and low productivity. Instead, the focus should be on making the transition to the 'high road' of high investment in capital and labour, leading to high skills, high productivity and high value-added.[19] The 'high road' is characterised by high labour standards and the TUC consequently supported increased regulation, albeit "intelligent, well-designed labour market regulation", in order to ensure these.[20]

14. Whilst the concept of labour market flexibility has traditionally been unpopular amongst its members, the TUC does not reject it outright. Instead it supports a model of 'flexicurity', combining flexibility with security. 'Flexicurity' is a label normally applied to Denmark's combination of generous welfare, active labour market policies, and low Employment Protection Legislation (EPL).[21] But the TUC appear to mean something rather different. They highlight the distinction that academics have drawn between the different ways in which labour markets can be considered flexible. In particular, they note how labour market flexibility is frequently taken simply to mean external numerical flexibility—or the ease with which companies can hire-and-fire. Instead the TUC is keen to promote functional flexibility—the ease with which individual workers are able to undertake different tasks—and the opportunities for more flexible working arrangements for those who, at various points of their career, may prefer not to work conventional hours.[22]

15. The TUC claim that, rather than threatening future employment, EPL need not jeopardise, and may even enhance, prospects for long term full employment. If an employer's ability to hire and fire in response to changing circumstances is constrained, it will have to use its existing workforce more flexibly, which encourages employers to train their workforce. A better trained workforce often leads to higher productivity. It is certainly true that, if one were to look at Germany or France, one might conclude that EPL damages employment. However, the example of countries such as Sweden indicates that this need not be the case. And the experience of the UK, where increases in regulation have gone in tandem with high levels of employment, further highlights the lack of a clear association.

16. The issues raised by the TUC highlight some important aspects of labour market flexibility. It is clear that flexibility is multi-faceted and not limited to questions of the ease of hiring or firing, or constraints on shift patterns or total working time. It is also clear that the shortcomings of the UK labour market are not primarily related to regulatory constraints on employers' ability to change the number of workers or the hours worked: the OECD's figures show that the UK's EPL continues to be amongst the lowest in the OECD, and there are limited constraints on working time.[23]

17. This does not, however, mean that increases in regulation in these areas will improve matters or overcome the shortcomings. The fact that the UK already has substantial flexibility in these areas can be seen as an advantage to be maintained whilst addressing these shortcomings. There need be no link between low levels of EPL and poor levels of functional flexibility and addressing the latter does not have to be to the detriment of the former. But neither need numerical flexibility be synonymous with a diminution of work standards or increases in job insecurity. The example of Denmark shows how these can successfully co-exist.

18. Denmark has become a source of considerable interest to policy-makers and academics alike for its 'flexicurity' model. In Denmark, high levels of external, numerical flexibility, reflecting low EPL levels, are combined with generous income protection, and Active Labour Market Policies (ALMP). This combination has created high employment levels, as well as high levels of job satisfaction and security amongst the workers. This has been achieved by the substitution of strong agreements between trades unions and employers' organisations for formal EPL. Denmark has high trade union membership. Naturally, the Danish model is the product of a unique context which might limit its applicability elsewhere, but its 'hybrid' model clearly shows that the various aspects of labour market flexibility are not juxtaposed in the way they are sometimes assumed to be and need not undermine the rights and conditions of workers.

19. The TUC emphasised that higher levels of EPL need not damage employment rates. This is certainly true of 'core workers'—prime age, male, skilled workers. Neither need higher levels of EPL constrain the movement of workers from one sector of the economy to another and so hinder flexibility in that respect. However, it does seem that, in reducing 'churn', EPL can increase the duration of unemployment and can hinder the entry to the labour market of more marginal workers such as youths, older workers, or women returning after childcare.[24] This clearly runs counter to the Government's approach to dealing with social exclusion, and its stated desire to promote full employment and choice and diversity in work. It is also suggested that high EPL can damage the prospects of attracting inward investment.[25]

20. Whilst the pace of regulatory change might have created problems for some firms, the evidence for any serious impact is limited and, at least to some extent, based on general impressions about the nature of the economy and the regulatory environment. We can find little hard evidence to support the assertion that UK competitiveness is being threatened by overly stringent employment regulation. Consequently, we found the obsession with the growing burden of regulation slightly bemusing. Whilst we acknowledge that there has been reregulation of the labour market since the late 1990s, the UK still has a more lightly regulated labour market than most comparable economies. In the Porter Report, which reviewed UK competitiveness, excessive labour market regulation was not cited as a concern, nor deregulation seen as a useful strategy for improving the country's competitive position.[26]

21. The debate about regulation versus flexibility is in danger of losing sight of the important issues—namely the pursuit of competitiveness and the need to ensure good, minimum standards of protection for employees. Flexible labour markets and regulation are good only in so far as they contribute to these goals. We welcome the principles set by the Lisbon Strategy, combining flexibility with social cohesion. The realisation of this strategy might involve the introduction or the removal of specific regulations, but this would need to be judged on an ad hoc basis. But it should be reiterated that the main challenges that the UK economy faces are not exclusively matters of regulation or deregulation, but in areas that we have addressed in several Reports, including skills and training, R&D and technology transfer, the supply of capital for investment, and narrowing the productivity gap with our competitors.[27]

22. The 2003 Budget set out twelve principles to guide the Government's intervention in the labour market. These include intervention where: there is a significant problem that can be addressed only through government intervention; full consideration has been given to the alternatives to regulation; the consequences for the small firm sector, in particular, have been assessed; the impact on the employment opportunities of disadvantaged groups and on productivity and growth have been tested; a cost-benefit analysis (or Regulatory Impact Assessment) has been conducted; proper consultation has been undertaken, and information to aid compliance and resolve disputes is made available.[28] If fully and consistently applied, these principles should ensure that regulation proceeds only where necessary. The introduction of two 'regulation' days a year, when new regulations come into force, will help.

23. The Government's emphasis on regulation as a last resort, only to be used where the required goals cannot be achieved through other means, is significant and it is a position that we support. It is clear that, where perceived problems can be resolved through the agreement between the social partners, outcomes are better. Recourse to regulatory intervention seems less good at delivering solutions that please all parties involved. It was instructive that, in Denmark, government intervention in labour market issues is quite limited. Instead, the 'governance' of the labour market is provided through the collective bargaining process. As a result, most labour market matters have been successfully dealt with without recourse to legislation, and to the evident satisfaction of all those involved. We are not suggesting that the Danish model of collective bargaining should be reproduced here—it is based around a very different set of labour market institutions which are not readily transferable—but use the example to highlight that regulation is not always the most appropriate means to achieve goals, and that the greater the involvement of all interested parties, the more likely the outcomes are to be mutually satisfactory—a point highlighted by the unanimous praise we heard for the process for revising the minimum wage.[29]

1 DTI Full & Fulfilling Employment: Creating the Labour Market of the Future (2002), p. 3 Back

2 Ibid, p. 8 Back

3 App 6, para. 9 Back

4 App 6, para. 6. See also DTI Full & Fulfilling Employment: Creating the Labour Market of the Future (2002), for a fuller discussion Back

5 Facing the Challenge: The Lisbon Strategy for Growth and Employment Report from the High Level Group chaired by Wim Kok (November 2004), p. 5. Hereafter referred to as 'the Kok Report'. Back

6 For example, Kok Report, p 28 Back

7 Q 68 Back

8 Q 72 Back

9 App 2, para 2 Back

10 App 2, para 2. Almost all of this figure was, however, accounted for by the Working Time Directive, aspects of which the BCC is not opposed to. The Working Time Directive is discussed in more detail in Chapter 5 of this report. Back

11 Q 133 Back

12 App 6, Annexes A and B list regulations and estimate the cost of their implementation. Back