Memorandum by the Unquoted Companies Group
Note: The Unquoted Companies Groups (UCG)
is an informal group of 30 or so Chief Executives of owner-managed
(unquoted) companies. The family businesses we represent are spread
right around the country (not only in the prosperous South-East),
and we stress continuity and long horizons. Such continuity is
critical for the UK's economic and social life. Our area of particular
interest is the whole of the unquoted sector of the British economy,
which includes most of the UK's small and medium-sized firms.
We are happy for this response to be made publicly
available to any enquirer.
Chairman, UCG Industrial Relations Committee[113]
THE IMPORTANCE
OF FREE
MARKETS
1) The EU has been responsible for a large
increase in labour regulation, and now wishes to go further. In
this latest Green paper, the Commission asks for a "debate"
on further regulation, and better policing. It does not question
the need for regulation which it takes (p. 5) as obviously necessary
"to offset the inherent economic and social inequality within
the employment relationship". The UCG disagrees that regulation
offsets economic and social inequality.
2) On the contrary, free markets and freedom
of movement are the best defence for the under-privileged. These
vital concepts, which underlie English law, and which the UCG
supports, are absent from the Green Paper.
3) We should help the UK government in its
current attempts to stem the tide of regulation, a particular
example being its defence of our opt-out from the 48 hour working
time maximum. The UK's free-market tradition really does have
something to show our continental neighbours, as we will demonstrate
below. We urge the Select Committee to enter the Commission's
"debate" with the aim of rolling back labour regulation.
4) To consider the Green Paper, the Select
Committee puts forward questions on the flexibility of UK labour
markets, on employment security, and on "flexicurity".
Let us take these in turn, and then turn to Committee's final
heading, the role of EU regulation.
FLEXIBILITY OF
THE LABOUR
MARKET
5) The Select Committee asks: how flexible
is the UK labour market, and what are the benefits of this flexibility?
The UK's labour market, since the Thatcher reforms, has been more
flexible than all other EU states. Flexibility has two broad forms:
wage flexibility and working conditions flexibility. The UK's
well-known wide wage differentials point to flexibility along
the wage dimension. Wide differentials mean unskilled workers
(eg, young and inexperienced workers) are paid much less than
high-skilled. The benefit of low unskilled wages is that firms
are encouraged to take on unskilled workers who have low labour
productivity. Unemployment is thereby avoided. A particular benefit
is that unskilled workers in the UK are not cut out of work by
high wages set by national collective agreements as happens in
France, Germany and Italy.
6) Flexibility of working conditions has
many aspects, and the UK does well here, too. An important example
is working hours, shown in Figure 1. As can be seen, the UK has
more working both long (over 45) and short (under 20) hours. Only
about 50 per cent of our workforce works in the normal 20-45 hour
range. In regimented France and Germany the comparable figure
is around 80 per cent. Workers and businesses have a variety of
desires and constraints. The benefit of UK hours flexibility is
that it offers more "niches" in which these desires
and constraints can be met.
7) A further benefit of UK's labour market
flexibility is that it limits the tendency towards a growing black
market that exists underneath heavily regulated markets, although
this may be difficult to quantify. It goes without saying that
those employed in the black market evade taxes, health and safety
and other protections. Black markets naturally arise when labour
markets become inflexible and too costly. The tendency of regulators
is then to attempt to clamp down further, leading to more regulation.
For example, laws preventing dismissal (see below) lead to the
development of temporary contracts, and "bogus" self-employment,
both of which have to be further regulated. This path leads to
the French situation where a powerful Labour Inspectorate enforces
a detailed 2,000 page Code du Travail. Employers have to
become lawyers. The UK has not, fortunately, set up a Labour Inspectorate.
8) It should not therefore be said that
strict labour market regulation is an efficient response to "inherent
social and economic inequality". Rather, it is part of an
anti-market legal inheritance (see Siebert 2005 and 2006). The
French type of state-oriented Code du Travail, noted above,
has been passed onto many countries in Europe. By contrast, Britain
and countries in its sphere of influence (including the US) inherited
the English common law, where independent judges and juries are
so important that an elaborate code has never been possible, or
needed. Freedom of contract, not state intervention, has been
the norm.
EMPLOYMENT SECURITY
9) Here, the Select Committee asks, what
is the extent of employment security in the UK labour market,
and what would be the benefits of changing the present arrangements?
Employment protection legislation (EPL) is a prominent feature
of EU labour law. EPL enhances the job security of incumbent employees
by making dismissal difficult, for example by requiring consultation
with the works council and/or Labour Inspectorate, plus generous
compensation. The UK's unfair dismissal system via Employment
Tribunals is light by comparison. Table 1 shows the contrast between
the UK and France. We see that the OECD indicator of strictness
of EPL is much higher, 2.5, in France, compared to 0.9 in the
UK, which is one of the lowest in the OECD.
10) The consequence of EPL is, paradoxically,
to increase employment insecurity—a disbenefit. First, firms
circumvent the law by moving out of the country (the case study
business in our Appendix has opened new plants in Poland and China).
Second, firms resort to temporary contracts. Figure 2 shows this
process at work clearly. There is a good correlation between the
strictness of EPL and the per cent of workers on temp contracts.
The UK and the US are at the bottom left, while Portugal, Spain
and France and others with high EPL are at the top right.
11) Third, EPL causes firms to become more
"choosy" in hiring workers if they cannot fire them.
This effect particularly increases the insecurity of vulnerable
groups, who do not have a "track record". Evidence is
given in Table 1, which shows the high long-term unemployment
in France. Table 1 also shows the poor employment prospects of
young workers, and old workers in France. In fact, only 36 per
cent of the 20-24 age group work in France, and only 34 per cent
of the 55-64 group—proportions which are far lower than
in the UK.
12) Of course, EPL has not worked alone
to create France's poor labour market. We have to recognise the
role played by high taxes, which push labour costs up. (High taxes
cannot be offset by workers accepting low wages because of France's
national collective bargaining arrangements, noted above.) Table
1 gives data on the tax position. Indeed, strict EPL, high taxes
and centralised collective agreements feed off each other. For
example, strict EPL means high long-term unemployment which in
turn requires high taxes to make the welfare payments.
"FLEXICURITY"
13) Here, the Select Committee asks how
helpful is the Commission's concept (Green Paper pp. 3, 4) of
"flexicurity", and whether changes in labour law could
help achieve it? In fact, "flexicurity" is simply a
buzz-word. It holds out the hope that it is possible to moderate
the unemployment effects of strict EPL by using active labour
market policies such as training and job search advice to help
those rendered unemployed by EPL. In other words, the hope is
that it is possible to have EPL without the ensuing two-tier labour
market. Denmark is thought to be a success in this respect (OECD,
2004, 97), with successful active policies. Yet, it should be
observed that Denmark has quite weak EPL—the horizontal
axis of Figure 2 puts Denmark quite close to the UK.
14) Indeed, the UK's relatively unregulated
labour market already delivers flexicurity, if we must use this
word. Increased labour law would move us further away. Grant Fitzner
(2006, 17) points out that the UK labour market is very dynamic,
with 5-6 million people moving into a new job each year, and a
similar number leaving. The vast majority of these job changes,
about 70 per cent, are voluntary (even classifying the termination
of temporary jobs as involuntary). Thus, the workers that wish
to remain in their job can, and those who do not, quit, which
is as it should be. We do not need a vast programme of active
labour market policies.
THE ROLE
OF EU REGULATION
15) It goes without saying that the free
market within the EU is of immense value to all who live in Europe.
This means we have to debate carefully what the Union ought to
do. Its core task is to solve common problems between states,
such as cross-border trade and the single market. Its task is
not to attempt to solve problems within states, such as laying
down requirements for labour law. The EU's constitutional principle
of subsidiarity forbids such attempts.
16) In fact, as Table 2 shows, directives
from Brussels have been responsible for much of the increase in
the burden of labour legislation over the last 10 years. The EU
role dates back to the 1989 Social Charter of Fundamental Worker
Rights (mentioned approvingly in the Green Paper, p.6), which
proposed a large programme of intervention. These interventions
are worrying for UCG members, and as shown in the Case Study in
the Appendix, one member estimates that new health and safety
and environmental regulations have cost the company an amount
equal to 5 per cent of the direct wage bill in 2003 and 2004.
We have arrived at a position of over-regulation, particularly
in view of the UK tendency to "gold-plate" EU directives.
17) In sum, the UK's flexible labour market
has grown up organically over many years, based on the English
common law tradition of freedom of contract. Other countries such
as France, for example, minutely regulate. Such regulation springs
naturally from the French tradition. We say, let both traditions
co-exist, in accordance with the subsidiarity principle, so that
we can see which is better. Good policy is more likely to be promoted
in the EU by the power of example than by directives from Brussels.
REFERENCES Fitzner,
Grant 2006. "How Have Employees Fared? Recent UK Trends",
Employment Relations Research Series 56, Department of
Trade and Industry: Employment Market Analysis and Research.
OECD, 2002. Employment Outlook 2002,
Paris: Organisation for Economic Cooperation and Development.
OECD, 2004. Employment Outlook 2004,
Paris: Organisation for Economic Cooperation and Development.
Siebert, W Stanley, 2005. "Labour Market
Regulation: Some Comparative Lessons", Economic Affairs,
Vol. 25, No. 3, September 2005:3-10.
Siebert, W Stanley, 2006. "Labour Market
Regulation in the EU-15: Causes and Consequences—A Survey",
IZA Discussion Paper No. 2430, available at SSRN: http://ssrn.com/abstract=947090
Figure 1
USUAL HOURS/WEEK, MAIN JOB, MEN AND WOMEN—COMPARISON
BETWEEN THE UK AND OTHER MAJOR ECONOMIES
Figure 2
THE LINK BETWEEN EMPLOYMENT PROTECTION AND
TEMP WORK
Source: OECD, 2002
Table 1
LEGAL ENVIRONMENT AND EMPLOYMENT—COMPARISON
OF FRANCE AND UK
|
| UK
| France |
|
| (a) OECD index of overall strictness of employment protection, regular employment, average for late 1980s and 1990s
| 0.9 | 2.5
|
(b) Taxation of wage income, as % of average production worker gross wage (single worker, no dependents), 2000 Income tax
Employee social security contribution
Employer social security contribution
| 16.7%
8.1%
10.0%
| 10.5%
17.7%
40.0%
|
| (c) Long-term unemployment, % of total, average 1995-2000
| 34 | 42
|
(d) Employment/population ratios, average 1995-2000
20-24 age group:
25-54 age group:
55-64 age group:
| 69
79
49 | 36
77
34
|
|
Notes and Sources:
(a) Measures employment protection as a 0-4 index including scores for procedural inconveniences for dismissal, notice and severance pay for no-fault individual dismissal, and difficulty of dismissal, OECD Employment Outlook 2004, Appendix 2.A2—for example, France requires 16 months pay as compensation to an employee with 20 years service, the UK 8 months.
(b) Estimate of taxation of wage income, OECD data website at www.oecd.org/dataoecd/44/0/1942482.xls.
(c), (d) Source is OECD Employment Outlook 2004.
|
Table 2
LABOUR REGULATION MEASURES INTRODUCED SINCE 1997, AND
THE EU ROLE
|
| Area | Measures introduced
| EU role |
|
| Minimum wages | National minimum wage introduced 1998, now £5.35
| |
| Minimum for 16-17s introduced 2003, now £3.30
| |
| Hours restrictions | Right not to work 48 hours; rest periods; 4 weeks paid leave
| EU directive |
| Unfair dismissal | Reduction in the qualifying period for unfair dismissal from 2 years to 1
| |
| Employment agencies | Reform of regulations
| EU directive pending |
| Family friendly measures | Increased maternity leave; paternity leave, and parental leave; right to request flexible working conditions
| |
| Discrimination | Right to no discrimination on grounds of disability, sexual orientation and age
| EU directive |
| Equal treatment of part-time and fixed-term employees compared to fulltime, permanent counterparts
| EU directive |
| Information and consultation | Right to set up worker representative councils in firms > 150
| EU directive |
| Health and safety | Many laws
| EU directives |
|
113
Acknowledgments: We are grateful for the input of Michael
Brinton, Malcolm McAlpine, Professor W S Siebert, and Hugh Trevor-Jones. Back
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