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In today’s newsletter:
The latest labour market statistics
What this week's inflation figures mean
The Rise & Fall of the Soviet Economy
This week saw some disturbing labour market data: payroll employment has fallen and unemployment and the claimant count have risen, while vacancies have fallen yet again.
The overall labour market picture is becoming increasingly gloomy. The big rise in the national living wage in April (and its spread to younger workers), and the massive increase in employer national insurance contributions are obvious factors. But there are also worrying longer-term trends, as I argue in my new IEA paper Liberating the Labour Market.
In the paper I point out that a well-functioning labour market is one which adapts rapidly to change, reallocating people from low-productivity to high-productivity jobs as new opportunities emerge. The UK’s set-up has never been perfect, but for a long time we were able to point to a labour market which was more flexible than the equivalent in most European countries, with more of the working-age population employed and fewer unemployed or inactive. This advantage has now been seriously eroded, with more and more mandated benefits which the employer must provide, and tighter and tighter prescription of what goes into employment contracts. So productivity has flatlined and growth virtually disappeared.
Employers must provide a growing range of benefits (for example parental leave, flexible working, pension auto-enrolment) which act as hidden payroll taxes, reducing firms’ willingness to employ permanent staff - and also leading to slower pay growth as businesses gradually pass the costs on to employees.
Anti-discrimination legislation and an increasingly expansive interpretation of equal pay (most notoriously exemplified in the travails of Birmingham City Council) means organisations live in fear of tribunal claims. The minefield that is unfair dismissal law – currently producing 25,000 claims annually – makes firms reluctant to fire poorly-performing workers and means that productivity suffers.
As a consequence of the growing jungle of regulation, large organisations feel obliged to employ squadrons of HR people – 450,000 at the last count. The HR profession may have its virtues, but it inevitably ‘gold-plates’ mandates to minimise risk, and imposes excessive levels of ‘training’ activity to enforce compliance – none of which adds significantly to productivity.
A radical government could shake up the labour market and boost our economic performance by stripping employment law back to the bare bones. This might involve restrictions on child employment, limits on hours worked by people engaged in transport and healthcare, cheap means of enforcing contracts, a compensated form of no-fault dismissal, and a much narrower focus in discrimination law (as suggested by Daniel Freeman and Alex Morton in their recent IEA paper).
But what we’re getting in reality is the Employment Rights Bill, a 300-page behemoth which adds a truckload of new mandates. It effectively imposes a £5 billion ‘stealth tax’ on employers, ultimately to be passed on to workers in lower wages.
The Bill’s measures – including Day One unfair dismissal rights, restrictions on zero-hours contracts, a default right to flexible work and enhanced powers for unions – will do nothing to promote the growth which the government says it wishes to promote. It will make employers reluctant to hire permanent new staff and make it more difficult to arrange changes in work organisation which could boost productivity.
An increasingly sclerotic labour market will particularly penalise new labour market entrants, who will struggle to find suitable work; we can expect higher youth unemployment and inactivity. But we will all suffer as faster economic growth, which could in principle ameliorate our desperate fiscal position, becomes unattainable.
Len Shackleton
Editorial and Research Fellow
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IEA Podcast: Executive Director Tom Clougherty, Editorial Director Kristian Niemietz, and Head of Media Reem Ibrahim discuss financial regulation, the latest unemployment statistics, and whether people want to be taxed more, IEA YouTube
Liberating the Labour Market
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The Employment Rights Bill returned to Parliament this week, and will impose a £5 billion stealth tax on British workers, according to a new report published by the Institute of Economic Affairs. The analysis warns that employment mandates, sold as helping workers, really function like hidden taxes that reduce their wages over time.
Professor J.R. Shackleton, the report’s author, argues that politicians exploit public misunderstanding about who really pays for employment rights. They often only benefit certain groups, but the costs are passed back to all employees through lower wage increases than they would otherwise receive.
The Employment Rights Bill’s measures – including day-one unfair dismissal rights, restrictions on zero-hours contracts, and enhanced union powers – will also make employers more risk-averse in hiring decisions. This will put a brake on the growth the government seeks to achieve.
Professor Shackleton, Editorial and Research Fellow at the Institute of Economic Affairs and Professor of Economics at the University of Buckingham, said:
“Politicians love to announce new employment ‘rights’ because they think employers pay the bill – but that’s an illusion. Every mandate, from parental leave to holiday entitlements, acts like a stealth tax that gets passed back to workers through smaller pay rises than they would otherwise receive. The only difference is that no money is raised for the Exchequer.
“The Employment Rights Bill will make this much worse, imposing billions in hidden costs that workers will ultimately bear themselves. The Government is not protecting workers – it is harming them and undermining its own alleged number one priority to boost economic growth.”
Liberating Britain’s Labour Market, Director of Communications Callum Price interviews Professor Len Shackleton, IEA YouTube
Rayner’s employment law forcing ‘stealth tax’ on workers, The Telegraph
Report Warns Rayner’s Union Bill Will Impose £5 Billion Stealth Tax on ‘Working People’, Guido Fawkes
Not just Rachel Reeves! Now Angela Rayner piles in with her own stealth tax raid too, The Daily Express
OUT OF POCKET Angela Rayner’s costly employment rights package is a ‘stealth tax on workers,’ report finds, The Sun
The report was also referenced in the Times, the Sun, EssexTV, Daily Business, LondonLovesBusiness, and The Cumbria Times.
News and Views
Rachel Reeves risks unemployment 'on scale not seen for years', Editorial and Research Fellow Len Shackleton was quoted in the Express
Professor Len Shackleton of the Institute of Economic Affairs said it was “not too late” for the Government to change course but warned of the level of threat to employment.
He said: “Today’s disturbing labour market data, with falling payroll employment and vacancies coupled with rising unemployment, show the impact of the National Insurance hike and employers’ anticipation of the costly effects of the Employment Rights Bill. Government cannot really create jobs, except for those directly taxpayer-funded – of which we have far too many in quangos, regulators and much of the civil service.
Head of Media Reem Ibrahim appeared on LBC’s Cross Questions with Iain Dale on Tuesday evening, LBC
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Reeves’s tax raid has ‘backfired on working people’, Economics Fellow Julian Jessop quoted in the Telegraph
Julian Jessop of the Institute of Economic Affairs think tank said the Chancellor’s decision to increase the minimum wage and employer National Insurance contributions was the “obvious culprit” for the latest jump in inflation.
This would “add to economic uncertainty and the downside risks to spending and investment”, he warned.
“The gap between inflation in the UK and the euro area has widened markedly since last October’s Budget,” he said.
“The obvious culprit is the continued pass through of higher payroll costs following the large increases in employers’ National Insurance contributions and in the national minimum wage.
“It was always likely that these policy choices would backfire on ‘working people’, both by raising prices and cutting jobs. But they are clearly making the Bank of England’s task a lot harder too.”
Should we introduce a wealth tax?, Head of Media Reem Ibrahim appeared on BBC Any Questions in Manchester on Friday evening, alongside Employment Minister Alison McGovern MP, Lord David Willetts, and Enver Solomon, BBC Radio 4
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Labour won’t boost growth by empowering HR professionals, Editorial and Research Fellow Professor Len Shackleton, CapX
Raise the price of cigarettes to stop smoking?, Head of Media Reem Ibrahim argued against paternalistic tax hikes, Channel 5
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The Rise & Fall of the Soviet Economy Part 1: From Tsarist Russia to Lenin’s NEP, University of Oxford DPhil Student Aymen Aulaiwi, IEA YouTube
A Brief History of the Soviet Economy - Part 1 | ||||||
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This is the start of a three-part series exploring the history of the Soviet economy and its modern revival, by Aymen Aulaiwi. | ||||||
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The sad truth about New Statism | ||||||
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By Mani Basharzad | ||||||
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