De-regulation won’t solve the jobs crisis

Today the TUC have published The Red Tape Delusion, the most recent in our series of ToUChstone pamphlets. Based on a comprehensive literature review undertaken by Howard Reed, the report (jointly authored by Howard and Stewart Lansley) systematically dismantles the neo-liberal argument that labour market regulation prohibits growth.

The UK labour market remains one of the least regulated in the developed world. Yet despite extremely low levels of protection at work, the business lobby has never been slow to tell us of the dire economic consequences that any improvements in workers’ rights will bring. For example, ever since the introduction of the minimum wage multiple warnings have been issued of inevitable rises in unemployment and reductions in job creation. These views are far removed from reality – over the last decade low paid sectors dominated by the minimum wage have been some of the fastest areas of growth, and as the Low Pay Commission have recently shown, during the recession low paying sectors have been more robust than the economy as a whole – despite being more tightly regulated than during the last recession. The evidence shows that in the UK and the US minimum wage legislation has not been an impediment to growth.

But although the orthodox economists who asserted that “the central problem of depression-prevention has been solved” have recently had to eat their words, this hasn’t stopped the neo-liberal de-regulatory chorus from returning. The British Chamber of Commerce assert that employment law is “stifling UK competitiveness”; the CBI report that “employers remain especially worried about the excessive burden of employment regulation” and the IEA is keen for the minimum wage to be cut.

This stance flies in the face of the economic evidence. In a detailed analysis of the relationship between labour market regulation and growth, looking both at cross-country economic performance as well as empirical studies of the impact of particular interventions in the UK, Lansley and Reed show that there is no evidence whatsoever that moderate levels regulation impede economic performance - and that there is good evidence that some types of regulation have positive economic impacts.

This is not an argument in favour of all regulation all of the time – but a clear refutation of the orthodox position that any labour market intervention is bad, and a call for a balanced and pragmatic approach to labour market policy, which recognises that it is possible to achieve successful economic outcomes (low unemployment, high employment participation and growth) with strong social and workplace protection.

Specifically, the research shows that:

• Trade unions have no significant negative consequences for labour market outcomes, and have positive effects in promoting workplace cohesion and social justice.

• Co-ordinated and responsible bargaining systems are associated with lower unemployment.

• Active labour market policies (for example, Job Guarantees), if well designed, can make a substantial difference to the employment prospects long-term unemployed people.

• In-work benefits boost labour supply while redistributing income to low-paid workers.

• Generous unemployment benefits combined with job search requirements are effective in reducing long term unemployment.

Looking at comparative evidence from around the world, the study concludes that a ‘reality-based’ assessment shows that Britain could take a bolder approach to labour market intervention as a means to improve social outcomes and enhance economic performance. Although Labour has implemented stronger measures in some areas, such as parental leave, childcare support and flexible working, Britain’s labour market remains closer to the US than the European model. Its levels of social protection, employment rights and collective bargaining fall well short of those in place in most European countries with the result that Britain remains towards the lower end of the international regulatory league table. But the evidence is clear – it is possible to achieve both social and workplace justice and economic dynamism.