Relaxing worker protection to boost employment belongs to the last century

Declan Gaffney runs down the reasons why we shouldn’t expect any more employment if we cut workers’ rights.

In a bizarre twist, the negative employment impact of coalition policy has recently come to be used as an argument for reducing employment protection for workers.

The argument is that as long as government is unwilling or unable to boost labour demand by relaxing its cuts programme, deregulation of labour markets is one of the few levers available to reduce unemployment.

Thus a controversial (and as yet unpublished) report commissioned by the coalition from the venture capitalist Adrian Beecroft calls for the abolition of unfair dismissal legislation and a paper by Dominic Raab for the Centre for Policy Studies today (pdf) seconds this call and adds a roster of further demands, such as exempting small businesses from the minimum wage for young people.

The assumption behind these arguments is obviously that deregulation would in fact reduce unemployment. But there are two big problems with this assumption.

The first is that the UK labour market is already one of the least regulated among comparable nations. This immediately makes predictions of any significant employment effects from further deregulation implausible.

The second is that nations with much higher levels of regulation have been at least matching and in some respects exceeding employment performance in the UK and other low regulation countries for some time.

Meanwhile the exemplary low regulation economy, the United States, has registered an abysmal employment performance at least since the turn of this century. The idea of lower regulation as a route to employment growth is therefore a particularly hard sell these days.

Taking these points in turn, the UK has the third lowest level of employment protection of all OECD nations. It is ranked 7th in the world for labour market flexibility by the World Economic Forum. The chart below shows where the UK fits in a sample of comparable wealthy nations. (Raab tries to argue, absurdly, that the UK has a particularly high level of labour market regulation.)

OECD-index-of-employment-protection
In the chart, these countries are colour-coded into three ‘families of nations’ using a standard classification based on geography and welfare state institutions. The point of grouping countries in this way is that we can compare employment performance with levels of employment protection.

The red columns, which generally show the highest levels of protection are continental Western European (CWE) nations; the blue countries with very low levels of protection are the English-speaking (Anglo) nations while the green Nordic countries are in an intermediate position, but closer to the CWE nations.

Because the United States has the lowest levels of protection, it is worth looking at how it compares with countries in the much more regulated CWE and Nordic groups. We show results for people of prime age (25 to 54) from 1991 to 2009. (The reason for concentrating on this age band is that its employment is less affected by educational participation and pensions policies.)

For men, prime age employment in the U.S. peaked at the end of the last century and then fell sharply.

As can be seen from the first of the two charts below, although there was some recovery in mid-decade, employment remained far lower than in the late 1990’s, before plummeting with the last recession. The CWE countries overtook the US at the turn of the century and the Nordic countries in 2005.

For women in the U.S. employment at prime age has also declined sharply since the late 1990’s, and with virtually no recovery prior to the last recession. As the second chart shows, while Nordic countries have long had higher employment for women, there has been a dramatic increase in the CWE nations, which overtook the U.S. in 2002.

Employment-rate-for-men-aged-25-54-1991-2009

Employment-rate-for-women-aged-25-54-1991-2009
Of course these differences in comparative employment performance over recent years can not be attributed solely to levels of labour market regulation. But they show that at the level of generality at which would-be deregulators are pitching their arguments, they have very little to offer.

During the 1980’s and early 1990’s when the U.S. labour market seemed to be responding much better to economic change than European markets, it was possible to argue that its low regulation, minimal protection environment was a model to be imitated by European countries seeking to tackle unemployment. Indeed the UK was an evangelist for this kind of argument in Europe well into the New Labour period.

But that argument can no longer be made with any intellectual honesty: the questions posed by the U.S. labour market now are about the long-term consequences of a deregulated model which has long ceased to deliver what it promised, and may in fact never have done so.

The notion of a simple trade-off between employment levels and employment protection is increasingly unrealistic.

Some, but not all, of the employment growth in Europe reflects selective deregulation over recent years, but this was from levels of protection which were far higher than those in the UK – and still are today, albeit with some convergence.

Deregulation of labour markets is not an open-ended route to increased employment, it is a strategy with diminishing returns. When protection is as low as it is in the UK, we should expect those returns to be minimal. The assumption that there are big employment gains from reducing employment protection in the UK from its current low levels belongs to the last century.

See also:

Raab’s attacks on workers’ rights are – surprise – based on no evidenceSarah Veale, November 16th 2011

Gideon’s grotesque attempt to blame workers’ rights for unemploymentRichard Exell, October 3rd 2011

Reducing job security won’t decrease unemploymentSara Ibrahim, October 4th 2011

Cutting workers’ rights will not increase employmentNicola Smith, January 10th 2011

Raab to face the wrath of Dale?Shamik Das, August 10th 2010

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