Select Committee on European Union Twenty-Second Report


48.  By way of background to our examination of the issues raised in the Green Paper we took evidence of the role played by labour law in influencing the UK's economic and labour market performance.

Economic and labour market performance

49.  Mr Jim Fitzpatrick MP, Minister for Employment Relations at the DTI, told us that the UK economy had been performing "exceptionally well" (Q 146). In support of this the DTI reported that the UK had a high employment rate of just below 75%, which indicated a strong, healthy labour market, with more people in work than ever before and also a low unemployment rate of 5.5%. The employment rate was the highest in the Group of Eight (G8) leading industrial countries and was already well in excess of the Lisbon target to reach a 70% employment rate for the EU as a whole by 2010. Only 23% of unemployed people in the UK had been jobless for a year or more compared with 46% in the EU25. (pp 85-96)

50.  The DTI accepted that labour law was by no means the only reason for this success but contended that the current framework of UK law aided labour market flexibility to the benefit of both employers and workers. As a result, the DTI stated that the UK had "one of the widest range of job types and ways of working available in the world" enabling workers and employers more choice of the type of work that suits them. In highlighting this, the DTI also noted that the OECD's Employment Protection Legislation index showed the UK with the least strict employment protection legislation across Europe.

51.  In line with most of the other evidence we received, Mr Nigel Meager, an economist and Director of the independent Institute of Employment Studies (IES), told us: "I could not agree more that the UK economy is in a relatively healthy state and the positive end-of-term reports that we keep getting from the OECD and IMF tend to reinforce that. We have had continuous economic growth and employment growth for well over ten years."(Q 4)

52.  Professor Shackleton of Westminster Business School added that the UK's GDP per head had overtaken that of a number of countries which were formerly ahead of us, such as France and Italy, and that inflation was broadly under control. He also stated that in his view the UK's labour market at the moment was in an enviable condition compared with those of many of our continental neighbours: "Employment continues to grow and over 70% of those of working age are actually in employment in the UK, whereas the figure in countries like Italy and Spain is less than 60%" (Q 3).

53.  The main economic flaw in the UK economy that Professor Shackleton identified was that labour productivity per hour worked remained lower than in France and Germany (as well as the United States) while, by comparison with other EU Member States, the UK suffered greater earnings inequality and poverty. (Q 3) Standardised comparative figures for the G7 countries published by the Office for National Statistics show that UK labour productivity per hour worked in 2005 (the latest year for which these figures are currently available) was 19% lower than that of France, 16% lower than the United States and 15% lower than Germany.[17]

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:

Office for National Statistics: 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

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