Select Committee on European Union Twenty-Second Report

CHAPTER 2: THE DEVELOPMENT OF 21^ST CENTURY LABOUR MARKETS

Economic context, technological change and globalisation

17.  The broad context for the Green Paper is the major impact of rapid economic and social change on labour markets throughout the EU. This continues to affect the nature and pattern of work, as well as influencing relationships between organisations and the people that work for them either as permanent employees or as temporary employees or self-employed contractors.

18.  Advances in technology in recent decades, combined with new patterns of global investment and trade, have transformed how and where in the world goods and services are produced and delivered. Businesses operating in global markets are subject to ever more intense competition. They need to be cost and quality conscious to ensure efficient production, delivery and customer service. This pressure has not been confined to producers of internationally traded goods and services. Businesses operating in non-traded markets also have to meet the requirements of increasingly sophisticated consumers, who as citizens also expect more from public and voluntary sector organisations.

19.  Organisations in all sectors of EU economies are therefore engaged in continual restructuring to increase productivity, lower unit production costs and improve product and service quality. Forms of restructuring vary by sector but the overall outcome is greater adoption of advanced technology, the introduction of new working practices and sometimes the transfer of entire production activities or aspects of production to lower cost localities inside and outside the EU.

20.  In the labour market demand has shifted in favour of professionally or technically skilled knowledge workers and, especially in the relatively fast growing personalised service sectors, workers with a high degree of "soft" i.e. personal skills. At the same time, demand has fallen for routine manual and white collar labour and unskilled labour.

New working practices

21.  Alongside changes in occupational structures, new working practices have altered the pattern and organisation of work, with growth of various forms of what the Green Paper describes as "non-standard work" (as opposed to "standard work" undertaken by employees with permanent employment contracts working full-time for a single employer). This takes various forms, notably part-time and temporary employment and self-employment.

22.  As the Green Paper notes[12] "The emergence of just-in-time management, the shortening of the investment horizon for companies, the spread of information and communication technologies, the increasing occurrence of demand shift, have led businesses to organise themselves on a more flexible basis. This is reflected in variations in work organisation, working hours, wages and workforce size at different stages of the production cycle. These changes have created a demand for a wider variety of employment contracts, whether or not explicitly covered by EU and national legislation."

23.  A related tendency has been for large organisations to focus on a core of essential functions and to outsource the remainder, which in conjunction with increased consumer demand for personal services has stimulated considerable growth in small businesses and self-employment. The Green Paper reports[13] that "the share of total employment taken up by those engaged on working arrangements differing from the standard contractual model as well as those self-employed has increased from over 36% in 2001 to almost 40% of the EU-25 workforce in 2005." The UK's Federation of Small Businesses (FSB) informed us that small businesses currently provide around 75 million jobs in the EU.

Economic and employment insecurity

24.  Structural change on this scale raises understandable social concerns and, at an individual level, can be a source of considerable personal economic insecurity. Although economists argue that technological advance and globalisation ultimately results in higher employment and living standards, there are inevitably winners and losers in the process of change.

25.  People worry that they might suffer prolonged unemployment or have to accept reduced pay and conditions of work. Similarly, while the emergence of new and varied patterns of work often matches the requirement of people who choose to work on a part-time or temporary basis—especially women and older workers, many of whom might otherwise remain outside the labour market—or prefer the relative independence of self-employment, others may fear the prospect of not being able to find a full-time permanent job.

26.  One obvious temptation is for societies to protect jobs, either by erecting trade barriers or, as is more common in the EU, by placing legal restrictions on the ability of organisations to restructure. Another temptation is to place restrictions on the ease or ability of employers to hire people on non-standard contracts or to protect people who lose their jobs by providing them instead with generous unconditional welfare benefits.

Responding to change

27.  On the basis of the evidence taken as part of this Inquiry, we consider all such responses to be self-defeating counsels of despair that will make the EU both less prosperous and less socially cohesive. We instead share the view—as expressed in the Lisbon Strategy[14] objective of "sustainable growth with more and better jobs"—that EU Member States ought to embrace rather than resist structural change. On this matter we agree entirely with the Department of Trade and Industry (DTI) which in its written evidence to us stated that "Equipping people to manage and take advantage of change, rather than to seek to protect specific sectors or jobs, is the best way to manage the uncertainties and opportunities of globalisation." (pp 85-96)

28.  In doing so, the aim must be to achieve high and stable rates of employment and strong growth in productivity while at the same time maintaining social cohesion by enabling actual or potential losers to adapt to change. Yet unfortunately it is evident from high rates of structural unemployment and slow growth in productivity, that the EU overall remains a long way from meeting the Lisbon objective; and that it continues to make slow progress towards meeting it.

Labour market flexibility

29.  The current conventional wisdom—shared by the majority, though not all, of those who gave evidence to our Inquiry—is that employment policies that promote labour market flexibility are a necessary pre-requisite for progress. Flexible labour markets enable economies: to sustain a high rate of employment combined with low stable inflation; to maintain a high degree of employment stability over the economic cycle; and to raise the rate of growth of productivity, which is the ultimate source of improvements in material living standards.

30.  However, it is important to note that labour market flexibility is a complex phenomenon with several dimensions. The economist Professor Len Shackleton, of Westminster Business School, informed us that economists normally referred to four different types of flexibility (Q 15). These were:

• numerical flexibility: essentially the ease with which employers can "hire and fire" in response to changing demand;
• working time flexibility: the ease with which employers can adjust working hours and patterns of work, such as shifts etc.;
• functional flexibility: the ease with which workers can be redeployed to new tasks or are able to adapt to change, particularly improvements in technology; and
• wage flexibility: both the ease with which earnings adjust to cyclical fluctuations in demand for labour and the ease with which the earnings of different types of worker adjust to structural shifts in demand.

31.  Much public policy debate centres on how combinations of labour laws, employment policies, welfare systems and social institutions currently operating in EU Member States contribute to improving the flexibility of the labour market on each or all of these dimensions.

Different policy "models"

32.  In the course of our Inquiry we heard repeated references to a variety of so-called "models" of policy and practice. There is, for example, the European Social Model (a generic name for the systems of legal employment regulation, collective industrial relations, progressive tax funded public services, and generous insurance-based social welfare regimes) that operates in one way or another in many western continental European countries. This is often contrasted with the Anglo-Saxon Model observed in lower taxed, less unionised, and more lightly regulated economies, notably the United States, the UK being the main example in the EU.

33.  It is important to recognise that there is no single homogeneous European Social Model. There are marked differences in practices between the strongly collectivist models operating in the Nordic countries and Dutch/Germanic "Rhineland" countries and the more regulatory models found in France and southern European countries, just as there are between the United States and UK versions of the Anglo-Saxon model.

34.  We heard that each of these models has its strengths and weaknesses—none is necessarily superior to the others. Some are considered better at promoting certain dimensions of flexibility rather than others. France, for example, is considered to score poorly on numerical flexibility, working time flexibility and wage flexibility, all of which may account for its relatively high unemployment rate. Yet by the same token France scores higher on skills and functional flexibility and is second only to the United States when the world's leading economies are ranked according to their levels of hourly labour productivity. The UK, by contrast, has a world beating employment rate and relatively low unemployment but compares poorly on productivity (a matter to which return in Chapter 3). (QQ 13-15)

35.  Moreover, each model reflects legal tradition, custom and practice in individual Member States and no model, whatever its merits, should therefore be viewed as offering a blueprint that might be easily applied throughout the EU. Nonetheless, the experience of different models provides useful insights that might inform policy decisions at either EU level or UK and other individual Member State levels. Also, as we heard, important aspects of the Danish version of the Nordic model and of the UK model are implicit in much of what the Green Paper has to say about possible modernisation of labour law at either Member State or EU level.

The consequences of employment protection legislation

36.  Both the UK and Denmark, for example, adopt a light approach to employment protection laws governing the ease of hiring and firing (i.e. there are relatively few legal constraints on numerical flexibility). (Q 13) The experience of both countries in this respect is generally viewed favourably. In the Green Paper it is suggested that strict employment protection laws which, in the face of structural change, attempt to protect existing jobs by making it difficult for organisations to restructure, can have the unintended consequence of deterring job creation in general and the creation of permanent jobs in particular[15].

37.  The Green Paper suggests that this can result in a higher rate of structural unemployment (especially if the only way employers can easily avoid firing restrictions is to hire staff on short-term contract) or give rise to a two-tier labour market with a stratum of less protected precarious employment that is more prone to the forces of change than protected employment. In some cases both problems may arise.

38.  In discussing this possibility, the Green Paper cites the Employment in Europe 2006 report[16] which refers to research showing that stringent employment protection legislation reduces the dynamism of the labour market, has a negative impact on productivity and segments the labour market in favour of so-called employed "insiders" in protected jobs and to the disadvantage of "outsiders" (both those unemployed and precariously employed).

39.  In similar vein, Professor Shackleton told us that "cross country analyses indicate that overall employment tends to be lower where employment protection is greater. Similarly, higher degrees of employment protection are associated with higher unemployment of women and young people, with a greater reliance on temporary and other forms of 'atypical' employment and a larger proportion of activity in the informal or black economy". (pp 13-15)

40.  This conclusion is not without its critics. The TUC, for example, stated that independent research had found no negative correlation between employment protection legislation and unemployment, employment levels or innovation and productivity. (pp 52-68)

41.  However, the consensus of opinion presented to us indicated that stringent employment legislation could hamper job creation and lead to segmentation of the labour market. (QQ 7-9, 39-42, 63, 70) (pp 85-96)

42.  The Committee welcomes the Green Paper in opening up a debate on whether and how employment protection legislation might be modernised to assist labour market flexibility within the EU, while at the same time highlighting the need for accompanying measures to help people cope with change and reduce the insecurity they might face in a less protected labour market.

43.  However, our conclusions and recommendations on the ideas outlined for discussion in the Green Paper are based not only on the extent to which we consider them to assist the Lisbon objective for the EU as a whole but also, and indeed primarily, upon their specific relevance to the UK economy and labour market.

44.  In this latter regard, our evidence has shown that the UK, by contrast with most other EU Member States, has relatively light employment protection legislation. One consequence of this is that relatively fewer UK workers have non-standard contracts of work and, of those that do, the vast majority prefer to have them. Moreover, while there are exceptions, such workers enjoy similar employment rights to employees with standard work contracts, and in several ways these rights have been strengthened in recent years as a result of legislation introduced independently by the UK in addition to those resulting from the implementation of EU directives. (for example: (QQ 12, 41,146)) (pp 119-122, pp 85-96 and pp 37-40)

45.  We conclude that most of the issues raised in the Green Paper are already adequately addressed within UK labour law where the labour market is relatively lightly regulated in comparison with some other Member States.

46.  In consequence, we recommend that it would not be helpful to introduce new EU wide changes to labour law since this would not meet the specific circumstances of the UK nor of other individual Member States.

47.  We consider, nevertheless, that the Green Paper provides valuable insights into the role of labour law in promoting labour market flexibility and in enhancing the genuine employment security that comes from helping people to cope with structural change. In addition, we welcome the focus it provides on what individual Member States might learn from the experience of others when deciding what reform of labour law or other employment and welfare policies might best help them to meet the economic and social challenges of the early 21^st century.

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12   op. cit. page 5 Back

13   op. cit. page 7 Back

14   The "Lisbon Strategy" was adopted by the European Council in March 2000. Its strategic goal is: "to become 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" Back

15   op. cit. page 8 Back

16   op. cit. page 81 et seq. Back