Making work pay is good for growth
Don’t listen to populist outcry over the Employment Rights Bill, all the evidence shows protecting workers from exploitation is good for the economy, says Sam Fowles
Labour workers’ rights reforms have prompted predictable howls of outrage. The Employment Rights Bill, apparently, “injects fear” into business and will “damage British competitiveness”. Ironically, the most hysterical wails come from populists who claim to “speak for ordinary working people” whenever it’s a useful cover for persecuting immigrants or cutting benefits. In fact, according to Yougov, “ordinary people” overwhelmingly support Labour’s reforms.
The critics’ case is that increasing the regulatory burden on business will create a drag on investment, hiring and ultimately growth. The political right has made the same argument since the 1970s and has been proved consistently wrong. Last week’s headlines could have been copied and pasted from the same newspapers in 1998 when the Blair government introduced the minimum wage. Despite the apocalyptic predictions, the minimum wage did not register a statistically significant impact on employment.
When one follows the evidence, rather than tired pseudo-economic tropes, Labour’s reforms will only be good for the economy. A University of Cambridge Study, using one of the largest datasets available, showed increasing worker’s rights also increased employment. In markets with low levels of worker protection, companies can increase profits by spending less on their workforce. But this only works in the short term because workers who are treated poorly are less productive. This currently includes the UK – we lag behind European economies on most measures.
An incentive to invest
When companies must accord workers a higher standard of treatment, they are forced to look elsewhere to increase profits. This creates an incentive to invest and innovate. The Cambridge study concluded: “In the case of laws protecting workers in part-time, fixed-term, and temporary agency work, there is an immediate positive impact on productivity. In the case of working time and employee representation laws, the effect on productivity is initially negative, but becomes positive over a period of time (up to a year or more after the introduction of the law).”
This is absolutely the right prescription for our ailing economy. The main drag factors for the last decade have been low investment and low productivity. Government can’t provide all the investment itself, and Labour’s plans across a range of sectors rely on the private sector paying its way. Previous governments’ prescriptions (de-regulating and hoping the – misunderstood – invisible hand of the market will magically make companies invest when they have no incentive to do so) have transparently failed.
Hoping the invisible hand of the market will magically make companies invest when they have no incentive to do so) have transparently failed
Criticism of the bill has been illustrated with sob stories of “small businesses” which “can’t afford” to comply with the new rules. It’s inevitable that, as the market adjusts to the new regime, some businesses will fail. This is a feature, not a bug. Effective markets ensure that weaker companies fail and are replaced by stronger ones. Employers who can’t make their business work without exploiting their employees shouldn’t be in business at all.
Perhaps critics’ real worry is that Labour’s reforms are redistributive. Just as the minimum wage significantly increased the proportion of national income going to the middle and working classes, so the Employment Rights Bill will give working people a greater share of wealth and power. This, too, is good for the economy. As research from the universities of Siena and Florence shows, high wealth concentration creates a drag on growth. Where resources are highly concentrated in the hands of a small group, investment in unproductive and overseas assets increases. Where wealth is more diffused, more money is spent in the domestic real economy. This increases domestic demand and stimulates investment and productivity.
When it comes to who has the better economic arguments, it turns out we should trust the “ordinary working people” over the populist right.
Sam Fowles is a barrister