APPENDIX 3
Memorandum by the Chartered Institute
of Personnel and Development
The Chartered Institute of Personnel and Development
(CIPD) has over 120,000 members and is the leading professional
institute for those involved in the management and development
of people.
This memorandum sets out the CIPD's view on
how best to promote labour market flexibility in the UK. Section
1 defines what flexibility means for the economy. Section 2 looks
at flexibility from an organisational or workplace perspective.
Section 3 considers the role of employment regulation, while sections
4 and 5 discuss the impact of regulation on employment and productivity
respectively. In concluding, section 6 makes some recommendations
regarding employment regulation.
1. LABOUR MARKET
FLEXIBILITY: THE
ECONOMIC PERSPECTIVE
1.1 According to the Treasury, "A
flexible and efficient labour market has the ability to adjust
to changing economic conditions in a way that maintains high employment,
low inflation and unemployment, and continued growth in real incomes."
(HM Treasury, Flexibility in the UK Economy, March 2004)
1.2 This is a rather general definition.
In more specific terms, a flexible labour market will:
— enable the economy to maintain a
high degree of employment stability over the economic cycle;
— help sustain a low rate of structural
joblessness ("full employment"); and
— raise the trend rate of productivity
growth.
1.3 The flexibility that gives rise to these
outcomes has a number of well-known dimensions:
— real wage flexibility (the ease with
which earnings adjust to fluctuations in aggregate demand for
labour);
— relative wage flexibility (the ease
with which the earnings of different types of labour adjust to
structural shifts in the economy);
— numerical flexibility (the ease with
which employers can adjust labour inputs—people or hours
worked—in response to changes in demand);
— functional flexibility (the ease
with which labour can be redeployed to new tasks, or are able
to adapt to change, in response to changes in demand and improvements
in technology);
— occupational flexibility (or occupational
mobility, the ease with which workers can switch from one occupation
to another in response to changes in demand); and
— spatial flexibility (or geographical
mobility, the ease with which labour can move from area to area
in response to structural shifts in demand).
1.4 Labour market flexibility is sometimes
considered in relation to each of these dimensions in isolation
but is best thought of in terms of the manner in which they combine
and interact. This is important for two reasons.
1.5 First, there may be trade-offs between
different dimensions of flexibility. For example, a high degree
of numerical flexibility expressed in terms of frequent hiring
and firing and rapid labour turnover can, by its impact on the
propensity of employers to invest in training, detract from functional
flexibility. Secondly, some forms of flexibility can give rise
to wider economic and social costs, which will alter the perception
of how well the labour market adjusts to change. A society that
values job stability, for example, may prefer a labour market
where real wages or hours of work, rather than employment levels,
respond to fluctuations in demand over the economic cycle.
1.6 This implies that to be truly deemed
"flexible", the labour market should be exhibiting strong,
or at least improving, performance on stability, full employment
and productivity. The general consensus amongst economists is
that the UK labour market scores well on numerical flexibility
and relative wage flexibility, has been showing signs of improvement
on real wage flexibility (aided by improvements in monetary policy
and the impact this has had on inflation expectations), but has
performed less well on functional flexibility. This observation
is consistent both with the economy's relatively strong employment
performance in the past decade and continued relatively low productivity
by the standards of the United States, France and Germany. It
also suggests that the common assertion that "the UK has
a flexible labour market" should therefore be treated with
caution. This in part explains why the Treasury in 2003 concluded
that the UK economy had not yet met the flexibility test for membership
of the single European currency.
2. LABOUR MARKET
FLEXIBILITY: THE
ORGANISATIONAL PERSPECTIVE
2.1 At the level of the organisation or
workplace, "flexibility" is best thought of as the ease
with which managers are able to respond to market pressures as
they strive to meet the demands of their customers or clients.
Managers will pursue their objectives in different ways and with
varying degrees of success. But high performing organisations
are found to be those that score highly across the following flexible
dimensions of human resource management:
— flexible management of working time
to ensure that they provide customers with what they want when
they want it—which in today's "24/7 society" can
be any time of day or night;
— ongoing investment to provide staff
with the ability to move easily between different tasks, adjust
to new technologies, and adapt to new working practices. This
involves widespread use of team based working, giving staff the
opportunity to exercise discretion on the job, and allowing staff
to effectively voice their opinions on how to improve performance;
— reward systems that vary pay in line
with individual or team performance, as well as fluctuations in
labour market conditions; and
— performance measurement and appraisal
systems that motivate staff to perform well and encourage management
to treat staff as valuable assets to be developed rather than
simply as "labour costs" to be minimised.
2.2 As with labour market flexibility viewed
from the macroeconomic perspective, some organisations will score
highly on some of these dimensions but not others, and possibly
encounter trade-offs between different management practices. Successful
organisations are those that find a balance across the various
dimensions of flexibility in a way that enables them to effectively
supply what customers and clients want.
3. EMPLOYMENT
REGULATION AND
LABOUR MARKET
FLEXIBILITY
3.1 The preceding discussion indicates that
there is a prima facie case for public policy interventions
designed to improve UK labour market flexibility, especially in
respect of functional flexibility.
3.2 Since policy interventions are targeted
at, and mediated through, organisations there are obvious implications
for management. The default response of many employers' organisations—and
the CIPD—is that government should intervene as little as
possible since organisations are better judges of how best to
manage their people than politicians or bureaucrats. On this view
policy-makers should thus limit their interventions to persuading
or exhorting organisations to raise their game, assisted by technical
support, guidance or voluntary codes of practice.
3.3 Despite a general preference for voluntarism,
the CIPD accepts that market failures, poor practice or bad practice,
sometimes provides a justification for more direct forms of government
intervention, ranging from financial sticks and carrots to statutory
employment regulation.
3.4 Indirect measures to foster flexibility
include government policies for education and training that, by
increasing the supply of basic and technical skills in the workforce,
can make it easier for organisations to adopt high performance
work strategies. Similarly, improving the quality of management
education and training makes it more likely that organisations
will develop the leadership capacity needed to deliver high performance.
3.5 However, recognition of the limits of
voluntarism and the case for policy intervention does not provide
justification for strong employment regulation. Most organisations
act in the best interests of those they employ. Moreover, as the
Treasury acknowledges, regulation carries potential costs as well
as potential benefits:
"Effective and well focused regulation
can play a vital role in correcting market failures, ensuring
health and safety and good working practices, and in driving up
standards. However, unnecessary or poorly designed regulation
can be an obstacle to flexibility restricting employment growth
and competitiveness, particularly for smaller firms. "
(HM Treasury, 2004, op cit)
4. EMPLOYMENT
REGULATION AND
JOBS
4.1 The potential cost of employment regulation,
insofar as it hinders labour market flexibility, is said to emerge
in the form of lower employment and/or slower productivity growth
than would otherwise be achieved. However, care should be taken
when assessing these possible effects, particularly in relation
to the argument that employment regulation amounts to a "tax
on jobs".
4.2 The regulation with the greatest potential
to harm jobs is the national minimum wage. But the sensible advice
of the independent Low Pay Commission has ensured that the minimum
pay rate so far set has had no discernible negative effect on
employment levels. As a result, the bulk of employers seem most
concerned about the combined cost of new regulations covering
working time, parental leave and the rights of part-time and temporary/agency
workers. Yet while these costs notionally fall on employers they
in fact fall on workers. Over time wages adjust downward to compensate
for any increased employment costs caused by regulation. In other
words, workers themselves pay for their improved employment rights.
Consequently there is little or no long-run negative impact on
jobs.
4.3 This point has been stressed by, among
others, Prof Steven Nickell, one of the UK's most respected economists
and a member of the Bank of England's Monetary Policy Committee.
As Professor Nickell concludes in a study published by the Bank:
"The workings of the labour market ensure
that employees end up paying for their new benefits (rights) in
the form of lower wages, a fact which is worth bearing in mind
by those who press for further extensions of employee rights.
They might consider asking employees whether they want to sacrifice
wages in order to have new rights. Typically, however, employees
and others usually have the impression that the costs of their
new rights will be paid for out of profits, an impression reinforced
because managers also like to claim this as well. " (Nickell,
S and Quintini, G "The recent performance of the UK labour
market", August 2001.
5. EMPLOYMENT
REGULATION AND
PRODUCTIVITY
5.1 If employment regulation does not impose
a "tax on jobs" why do so many employers complain? The
answer is that regulation tends to be introduced with such speed,
or in such a bureaucratic fashion, that organisations struggle
to cope.
5.2 This has obvious implications for productivity
where excessive form filling can seriously detract from everyday
business activities. A proportion of management time is inevitably
tied-up in understanding the law and implementing regulations.
Three-quarters of HR practitioners involved in the CIPD's 2002
employment law survey complained of a lack of adequate consultation
about forthcoming regulations, three-quarters of a lack of clarity
in the law, and half wanted to be issued with more guidance. Larger
employers are thus increasingly hiring staff skilled in employment
law, while smaller employers struggle to cope at all.
5.3 Regulation can also hinder functional
flexibility by fostering a tick box or compliance culture; the
need to fulfil regulatory rules stifling organisational creativity.
Half of all HR practitioners questioned for the CIPD employment
law survey referred to above thought that the law hindered the
ability of their organisations to meet strategic objectives.
5.4 Ironically, there is also a risk that
regulation will have unintended adverse consequences for those
it is designed to help. One possibility is that the tick box mentality
will result in organisations feeling that they have "done
their bit" for workers simply by meeting their legal requirement.
Similarly, narrowly constructed regulations that impose one-size-fits-all
requirements on organisations may result in some employers having
to abandon perfectly reasonable practices that suit them and their
workers.
5.5 This is evident from controversy surrounding
two EU directives, the Information and Consultation Directive—due
to be implemented in the UK by March 2005—and the Working
Time Directive.
5.6 Regulation to require employers to inform
and consult workers about plans for restructuring could in principle
help improve productivity—which is why the UK Government
published its initial thoughts on the EU directive in a document
entitled High Performance Workplaces. (DTI, High Performance
Workplaces: the role of employee involvement in a modern economy'
July 2002). However, there are also potential costs in the form
of reduced productivity that should not be overlooked.
5.7 The aim of the directive is to require
organisations with 50 or more employees to inform and consult
with representative employee bodies. It is important not only
that the latter prove to be genuinely representative but also
that they don't run counter to direct communication between managers
and workers, such as regular team meetings and employee attitude
surveys. Organisations have been making ever greater use of such
direct forms of communication—in some cases allying this
to partnership agreements with trade unions—in order to
increase employee motivation, commitment and trust. Any diminution
of direct communication caused by a regulatory requirement to
consult representative employee bodies could therefore hinder
rather than help efforts to raise productivity and thus offset
the potential benefits of the directive.
5.8 By the same token, while there is merit
in the Working Time Directive insofar as it ensures that that
organisations do not require people to work excessively long hours
against their will, the directive should aim to do no more than
act as a guideline to encourage voluntary changes in the behaviour
of employers and workers. The current threat to remove the right
of workers to voluntarily opt out from the terms of the directive
could, if carried through, harm numerical labour market flexibility
in the UK.
5.9 The flexible working regulations introduced
in April 2003, however, are an example of legislation designed
to operate with a "light touch". They were introduced
after extensive consultation with a wide range of interests, including
a task force with an independent chair, and this process made
it possible to adopt an imaginative but practical solution to
balancing the interests of employer and employee. The regulations
assume in effect that employers will be willing to give serious
consideration to an employee's request for flexible working, taking
into account the organisation's ability to accommodate it. Survey
evidence suggests that most employers are in practice taking a
positive approach to the regulations and accepting a high proportion
of requests, either as made or in modified form. Few employers
report serious costs or difficulties in implementing the regulations
(CIPD, A Parent's Right to Ask, 2003).
5.10 A light touch approach to regulation
is based on the fundamental proposition that, in order to have
positive benefits for both employees and business, the regulation
has to be implemented with this specific aim. If employers simply
aim for compliance, this may protect them from legal penalty but
is unlikely to bring positive benefits. So effective regulation
has to target employers' hearts and minds. The business case for
policies on equal opportunities, for example, assumes that the
employer will recruit from a wider range of applicants but the
real benefits will only accrue if the organisation redesigns its
recruitment processes, which is not of course required by legislation.
5.11 An example of legislation whose implementation
would be highly damaging to labour market flexibility is the draft
EU directive on agency working. The directive would require employers
to give agency workers the same terms and conditions as those
of employees doing similar work. In many cases eg nurses employed
by nurse-banks, this would lead to agency workers receiving lower
pay than at present. More generally, by raising the costs of agency
working the directive would make this form of work less attractive
to both employers and employees. Research evidence from a number
of countries shows that agency working is a route used by many
disadvantaged groups to gain access to permanent jobs.
6. CONCLUSION
AND RECOMMENDATIONS
6.1 The assessment contained in this memorandum
suggests that employment regulation is neither inherently good
nor bad but needs to be assessed in relation to specific labour
market issues.
6.2 If employment regulation is to help
rather than hinder labour market flexibility the government should
adopt as light a touch as possible in order to meet its regulatory
objectives. Minimum standards plus leeway for organisations to
suit regulations to their individual circumstances should be the
order of the day. It is also vital that policy-makers do everything
possible to combat the tick box mentality so as to ensure that
any employment regulation is a platform for better treatment of
people at work rather than merely a plateau.
6.3 With regard to future practices the
CIPD recommends that any proposed item of regulation should demonstrate
that:
— it is both appropriate and proportionate
to meeting its objectives;
— there is no reasonable non-statutory
alternative to meeting its objectives;
— there is sufficient scope to allow
organisations to tailor the regulation to their individual circumstances;
— all the potential costs and benefits
have been identified and, as far as possible, quantified;
— opportunities have been taken to
support the use of alternative dispute resolution processes, such
as conciliation and mediation, before applications are referred
to employment tribunals; and
— regulations are designed so that
employers are encouraged to use them as a means of improving performance,
and suitable guidance is made available for this purpose.
June 2004
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