Evidence Based Policy: Employment Rights

by endlesspsych

By Keir Liddle

The coalition government has announced proposals to change employment law to allow companies to sack workers within the first two years of their employment, in order to boost the economic recovery. It is hoped that relaxing certain employment legislation will reduce vexatious claims and encourage firms to take on staff; under the proposals, some small and medium businesses would be exempt from some of the more “stringent” legislation including the length of time that firms have to pay statutory sick pay.

As Dave himself puts it:

“We can only get our economy back on track by creating a climate in which the private sector can grow and develop, creating jobs and opportunities for people across the country. This year the Government is determined to help deliver many thousands of new jobs and I’m delighted that the companies joining me today are part of that.vAcross a whole range of areas you’re going to see the most pro-business, pro-growth, pro-jobs agenda ever unleashed by a government.”

The policy is supported by the fact that a similar rise in the time an employee can bring an unfair dismissal claim was thought to have resulted in a rise in employment in the 1980s. However, is there any evidence that such legislative changes often or always have an impact on employment rates, or provide a boost to the economy? This is an important question to address before effectively reducing the rights of employees. Recent figures for employment tribunals can be found here.

This report from the CBI suggests that many businesses hold a number of concerns regarding the current employment tribunal system, and view it with a degree of distrust and suspicion. The results of this survey indicated that 46% of employees felt that the tribunal system was ineffective at dealing with claims, and that 50% of employers believed they had seen a rise in vexatious claims. Worrying stuff. It is perhaps understandable why the government would think it necessary to address the concerns of business and increase their confidence in the system in the hope that it would have a knock on effect on job generation– especially at a time of economic hardship.

However, it is important to note that the above indicates simply what business thinks, and doesn’t address what impact employment laws have on… well, on employment.

The Trade Union Congress has published the following report, “Flexible with the Truth” prepared by Landman Economics, and, while undoubtedly politicised to a degree, its findings are worth exploring in light of current government plans.

The report explores labour market flexibility, which it defines as comprising the following four elements:

i)  wage flexibility – how free wages are to adjust.
ii)  employment flexibility – the extent to which workers are free to adjust
employment, and to choose whether to work or not, and how many hours to
iii)  Management flexibility – the extent to which managers are free to manage the
employment relationship, including the role and functions workers perform in the
workplace, their shift patterns, etc.  
iv)  Compositional flexibility – the extent to which the composition of employment
according to geographical location, industry, occupation, skill or nationality of
worker is free to adjust.
The study aims to explore empirically research looking at different measures of economic performance, such as:
• Labour market status – employment, unemployment and inactivity.
• Earnings and productivity.
• Subjective measures of job satisfaction and security.
The report finds that overall,  evidence for the proposition that labour market regulation has a negative impact on economic performance is mixed at best, coming mainly from regression models, which can be something of a blunt instrument when modelling complex systems. I’d suggest that multi-level regression models could provide a clearer picture, as they might allow explorations of the specific interactions of variables, macroeconomic factors, country-specific fixed effects or time trends and other salient variables that might have an effect. I must confess that my knowledge of the understanding and use of multi-level modelling outside of health and psychology applications is severely limited, so its suitability for use in economics is not something I can comment on with any great authority.
The report goes on to detail micro-economic studies that further support the idea that increasing employment legislation has little effect on the labour market. The report finds that the evidence suggests that the impact of employment legislation are mixed. In terms of productivity, it seems that both low and high employment protection laws negatively impact on productivity (having too much or too little job security are both poor motivators, seemingly). The report reaches the following conclusion on employment protection (EP):
Given that the UK already has one of the lowest levels of employment protection  of any developed country, it is unlikely that a substantial reduction in EP starting from the level we are at now would deliver drastically enhanced labour market performance. It could, instead, worsen  performance. It could also be that reducing EP from where we are now could actually reduce productivity.
For me, to come to a conclusive verdict on this topic is difficult, as the readily available evidence does indeed seem mixed. Without access to a great deal of data and research, I fear that it would be remiss of me to pretend to have a definitive objective answer as to whether or not Cameron’s plans either have or lack merit.