Labour law and the labour market
54. A question we sought to answer was the extent
to which these economic outcomes, both positive and negative,
could be attributed to the effects of labour law as opposed to
other factors. On this matter the views presented to us were mixed.
55. Some of those providing evidence attributed
the UK's strong employment performance to the fact that the labour
market is relatively lightly regulated by EU standards. However,
many of those taking this view also expressed concern that this
advantage was being eroded by an increasing burden of additional
regulation which was reducing labour market flexibility and adding
to the cost and complexity of employing staff.
56. The CBI provided us with a copy of its 2006
report Lightening the Load[18],
which makes the case for simplifying employment law. This listed
some 30 new pieces of employment legislation introduced between
1996 and 2006 alone, excluding some more recent legislation on
age discrimination in employment and the rights of working carers
(see table 1 at the end of Chapter 1 above). Many of these regulations,
notably the National Minimum Wage and the right of parents with
young or disabled children to request that their employers allow
them to work flexible hours, are the result of independent decisions
by the UK government. Others are regulations transposed into UK
law to meet the terms of Directives that apply to all Member States
of the EU. The flow of such regulations into the UK has increased
in the past decade since the UK agreed to the incorporation of
the Social Chapter of the Maastricht Treaty into the EC Treaty.[19]
This ended the effect of the previous decision to opt out in order
to avoid implementing EU employment regulations deemed not to
be in the UK's national interest.
57. On the whole, the UK employers' organisations
from which we took evidence appeared sanguine about the effects
of this new domestically and EU inspired legislation, but most
highlighted the resulting cost to businesses while also emphasising
the importance of ensuring that the UK maintains its current degree
of labour market flexibility, high rate of employment and low
unemployment.
58. Ms Susan Anderson, Director of Human Resources
Policy at the CBI, reported to us the CBI's estimate of the cumulative
cost of employment legislation introduced between 1998 and 2006,
based on the Government's own regulatory impact assessments: "If
you put all those costs together the total cost was a shade over
£37 billion. That is quite a considerable cost." (Q 39)
It is important to note, however, that this cost is not necessarily
borne by employers in the form of reduced profits. They may, alternatively,
choose to pass on the cost to customers, in the form of higher
prices, or to their employees, in the form of lower wages. The
precise outcome will depend upon the prevailing market conditions[20].
59. In its evidence, the EEF (the manufacturers'
organisation) stated: "The view of our members is that the
UK's labour market is relatively flexible when compared with other
Member States. Overall, EEF member companies are not demanding
significant reform of existing UK law in order to achieve more
flexibility. However, they are concerned to ensure that the current
level of flexibility is preserved." (pp 144-156)
60. Particular concern was raised by the Federation
of Small Businesses (FSB). Alan Tyrrell QC, Chairman of the Federation's
European Law Policy Unit, while emphasising the FSB's support
in principle for the national minimum wage (though not the rate
at which it has been increased) and existing law on unfair dismissals
and redundancy pay, referred to the results of a survey of its
members conducted in August 2006. Miss Lucie Goodman of the FSB,
describing the results of the survey said, "of the total
sample, 65% had employees while 35% did not. When the FSB asked
why they did not employ, 44% of that group of respondents said
that the reason was the volume of employment legislation, the
complexity of employment legislation and the overall burden of
red tape and the fact that employees are considered too great
a business risk. In other words, they would create more jobs,
if they did not feel threatened by regulation."(Q 64)
61. The TUC disputed this. TUC economist Mr Richard
Exell told us: "In the 1980s and 1990s when we were leading
the world on labour market deregulation our record on job creation
was consistently either much the same as or worse than the EU
average. If you look at our record on unemployment, our record
was much the same as or worse than the rest of Europe. When we
started to get an improvement from the mid-1990s onwards, it was
around the about the time we started partially re-regulating our
labour market with the minimum wage, rights to union recognition,
maternity rights, rights to time off work, age discrimination,
enhanced disability discrimination legislation—none of which
has been responsible for any reduction in employment." (Q 120)
62. In similar vein Mr Meager of the IES
commented: "There is a common argument that the UK's relative
success, in labour market terms, is due to its rather de-regulated
and loose employment protection regime and its rather light-touch
labour law. I really do not buy this argument at all." (Q 4)
Mr Meager's point was that the UK had always had a relatively
lightly regulated labour market, and that whatever the overall
merit of this, it did not explain the relatively recent turnaround
in the UK's economic fortunes. Indeed, it might be noted, for
example, that UK employment protection legislation, while still
relatively light, was strengthened in 1999 by way of a reduction
from two years to one year in the qualifying period for entitlement
to legal protection against unfair dismissal.
63. He went on: "If we go back to the 1970s
and 1980s when the UK by any measure of labour market performance
was seriously the sick man of Europe, we had the highest unemployment
rate of the large economies, very poor growth, recession and all
the rest of it, but we also had a de-regulated labour market then.
If anything labour regulation has got slightly tighter since that
time; it is still low but it has not got looser, so it is very
difficult to argue that the improved labour market performance
is a result of changes in labour law." (Q 4)
64. Mr Meager stressed in his evidence that
he was not suggesting that labour market regulation was irrelevant
to labour market performance. He accepted that there comes a point
at which tightening of labour law would have a negative effect,
but he believed that recent improvements in the UK's economic
performance were not the result of changes in labour law.
65. These observations are not, however, necessarily
inconsistent with the alternative view that light labour market
regulation is a factor in explaining UK economic performance.
It is generally accepted that the relatively poor performance
of the 1970s and 1980s was primarily a consequence of macroeconomic
instability caused in particular by failures of monetary and fiscal
policy under successive governments. This may have submerged the
benefits of a liberal regulatory regime which have only been fully
realised in the more stable macroeconomic conditions enjoyed since
the mid-1990s. It is also possible, as some of those who gave
evidence to us contended, for example (QQ 41, 70), that those
benefits may have since been partially eroded, though we have
received no conclusive evidence to support this contention.
The effects of labour law on
productivity
66. We also heard from small businesses that
the red tape associated with employment regulations diverts management
time from running their organisations and prevents employers from
giving priority to improving productivity. Mr Tyrrell from
the FSB told us of a huge increase in the number of calls on labour
law issues made to the Federation's helpline and that the average
business owner now spends 28 hours per month filling in government
forms: "All these regulations require administering. Time
is money. The time spent on administration is reducing the productivity
of the business. It reduces expansion and development, all the
other activities that go into making a business successful take
second place." (Q 63)
67. According to Professor Shackleton, determining
any link between labour law and measured productivity in the UK
is complicated by the fact that light regulation that encourages
high employment of people, who in other countries might remain
jobless, drags down overall productivity: "The most commonly
quoted measure is labour productivity and one of the effects of
having more people in work is that the average productivity tends
to fall because you are taking in workers who in a different context
would not get taken on". (Q 5) It should be noted, however,
that while this is obviously true arithmetically there is no necessary
trade-off between high employment and high labour productivity,
as the experience, for example, of the United States and some
of the Nordic countries attests (as we consider above).
68. The FSB nonetheless believed that the increasing
burden of labour law was having a fundamental negative effect
on productivity. As Mr Tyrrell stated "Our members feel
that if they had the opportunity to devote all their working time
to developing their business then that would certainly increase
the productivity of the business. We do not have any figures that
show that; indeed it is almost impossible to prove but it is widely
believed in the small business world." (Q 70) Ms Anderson
from the CBI also reported the results of a survey of its members
in which three quarters of employers said that they were spending
more time on administrative compliance, with smaller firms in
particular having to devote valued senior management time to the
issue. (Q 41)
69. The trade union Amicus (recently merged with
the Transport and General Workers Union to form the new union
UNITE) in written evidence to us argued that, contrary to the
view of UK business, light employment protection legislation—by
making it easier to dismiss workers—meant it was more likely
that businesses took a short-term approach to investment which
hindered productivity. (pp 108-110) Ms Hannah Reed, Senior Policy
Adviser, at the TUC also said that there were benefits of having
people in jobs for a longer period of time: "There are clear
benefits for employers in terms of retaining trained staff, not
having to experience the cost of re-investing in staff all the
time and having staff who are familiar with processes." (Q 121)
Ms Reed went on to say that "Ultimately, we cannot compete
in low cost, cheap jobs but we can compete by investing in skills,
and by investing in the knowledge base of the workforce."
(Q 121)
70. This view raises the possibility that labour
productivity per hour is higher in countries like France and Germany
because workers in those countries enjoy better employment protection.
Ms Anderson from the CBI, however, told us that this was a faulty
conclusion: "They do not have higher productivity because
they have more employment law; they have higher productivity because
they have a higher skilled workforce." (Q 43)
71. Mr Exell from the TUC concurred at least
to some extent with this view by referring to international studies
which "come to the conclusion that the strictness or otherwise
of employment protection legislation has very little impact on
levels of employment or productivity." (Q 116) Mr Exell
outlined the findings of a joint CBI-TUC working group established
in 2000 at the Invitation of the Chancellor of Exchequer. This
group concluded that the UK needed to make progress on four fronts
to meet the productivity challenge: capital investment; a better
skilled workforce; including management skills, innovation; and
best practice, including management practices with a high degree
of worker involvement. (Q 115)
72. We accept the evidence that the UK's relatively
light employment protection legislation, by facilitating a high
degree of numerical labour market flexibility, has benefited the
UK economy (although we recognise that this has not necessarily
been a major factor in the improved performance of the economy
in recent decades). This has helped the UK to avoid the high unemployment
and labour market segmentation witnessed in some other EU Member
States, notwithstanding the problems of structural unemployment
and social disadvantage suffered by some people in this country.
73. We recommend, however, based on evidence
to the Inquiry discussed later in this report, that the problems
of structural unemployment and social disadvantage in the UK need
primarily to be addressed by measures directed at tackling poor
skills and social inequality, and by enforcing existing labour
law where this is being flouted, rather than by changes to labour
law.
74. It was clear from our evidence that, whatever
the overall success of the economy, there remains a major problem
for the UK in relation to labour productivity. Our view is that
significant changes in labour law can have either a positive or
a negative, but only marginal, effect on productivity. We conclude
that, to improve the UK's productivity performance appreciably,
the priority needs are:
- to raise levels of investment in physical
capital and in research and development;
- to improve skills at all levels;
- to assist the innovation process; and
- to increase the standard of people management
and development in the workplace.
17 Office for National Statistics: www.statistics.gov.uk/downloads/theme_economy/feb07_ICP_HeadlineTables.xls Back
18
CBI Report, Lightening the Load-The need for employment law simplification,
October 2006 Back
19
This incorporation was achieved by the Treaty of Amsterdam Back
20
Nickell S J and Quintini G: The recent performance of the UK labour
market, Bank of England, August 2001 Back
