Callum Price: If Labour wants growth, it should scrap the Employment Rights Bill

Callum Price is Director of Communications at the Institute of Economic Affairs.

The Labour Party made two key promises at the last election. The first was to prioritise economic growth. The second was to not tax working people. There are good arguments to say that neither promise has been kept.

Clearly other priorities have taken precedence for much of their first year in office over economic growth. Some for good reason, such as a renewed focus on defence spending. Others less so, such as a renewed focus on keeping their backbenchers onside.

As for taxing working people, few not wearing a red rosette have agreed that a tax rise on employees stays the right side of that line. But with the Employment Rights Bill, the Government is effectively managing to effectively break both of those promises simultaneously.

When wages are discussed, the focus is usually on the advertised pay packet, but this is neither what the employee actually receives, nor what the employer actually pays. At the bottom end, an employee’s wage is obviously trimmed by taxes.

At the top end there is the salary, plus the employer NICs, pension contributions, their expenses and equipment, plus the cost of any rights that they receive. It is not free to give someone paid parental leave or sick days. It is certainly not free to deal with striking unions.

A business must consider all these costs when hiring someone. An increase in one cost must be funded by cost-cutting elsewhere. Introducing new employment mandates introduces new costs. The Government believes the Bill will impose a £5bn cost on businesses – likely a conservative estimate.

These costs will most likely be paid by cutting wage budgets that would otherwise go on new hires or paying existing workers more. The bill therefore acts as a stealth tax on working people, suppressing their wages but without the bit that the government desperately needs: revenue. Notably, the costs fall both on those working, and those seeking to find work. The benefits are not felt so widely.

But what about the Bill’s effect on growth? The Government’s economic analysis optimistically concluded that the Bill ‘could directly impact on growth in a positive but small way’.

One argument for this is that happier workers make more productive workers. This seems intuitive and is supported by some evidence. One study shows productivity is 8 per cent higher amongst workers who are most satisfied with their pay compared to those who are least satisfied. However, the evidence that links increased job satisfaction to employment rights specifically isn’t as forthcoming, by the Government’s own admission.  As the Bill is predicted to suppress wages, could it have the opposite effect?

Another argument the Government’s analysis examines is that a rise in labour costs incentivises greater investment in employees, for example through training, which will boost productivity. With less money to hire more people there is an increased need to find ways to boost the productivity of those you already have.

In addition, if employees are less likely to move elsewhere because of either fewer job opportunities or higher job satisfaction (or both), then the investment in them makes further sense to employers. Longer-term investment in employees becomes a safer bet if they’re less likely to move on.

However, this latter point is then directly contradicted by another argument. Government analysis posits that the Bill may lower the costs of switching jobs, particularly by granting certain rights from day one. This will allow workers to move more easily to more productive roles where they are paid better.

Free market economists would agree that a more dynamic and flexible labour market would help productivity for this exact reason. But it undermines the earlier argument that the Bill’s measures may increase productive investment in employees by reducing the likelihood of them moving. All in all, the analysis’ conclusion is tentative and perhaps a little optimistic.

But that hasn’t stopped Ministers crowing about the growth benefits. Angela Rayner has claimed the Bill will bring an ‘upgrade to our growth prospects’ and Jonathan Reynolds has claimed that their mission to grow the economy is ‘based on putting more money in working people’s pockets by making wages fairer and work more secure’.

But what do employers, the actual drivers of growth, have to say? An Institute of Directors survey said that 72 per cent believed it would harm growth, and 49 per cent will likely hire fewer staff. The five biggest businesses groups have combined to urge changes to the Bill to reduce negative impact on growth. Under the spectre of the coming bill, alongside the rise in NICs and minimum wage, unemployment has risen to its highest in 4 years and job vacancies continue to fall.

The Conservatives are right to shine a light on the impacts of the Bill, but they must use the time they have to think bigger about what a labour market that is fully geared towards growth really looks like. The Employment Rights Bill is just the latest in a long line of developments that have restricted a previously dynamic labour market, as my Institute of Economic Affairs colleague Len Shackleton has pointed out.

There are tweaks that could be made in the short term such as a stripping back of occupational licensing and scrapping the apprenticeship levy. But in the longer term, what would a more minimal, growth-first level of regulation look like? There are some things that most would agree should be regulated for, including limits on things like hours worked in potentially dangerous sectors like healthcare and transport, and a system of compensation for no-fault dismissals.

But there must be scope for more simplification and stripping back rules and mandates elsewhere, to reduce burden, complexity, and cost. It cannot be right that our regulatory system means that courts decide if wages are fair rather than a market based on mutual agreement; it certainly isn’t productive. Getting this right would be a boon to businesses, workers, and the economy alike.