Matthew Elliott: The House of Lords has done its job, now the Government must rethink the rest

Matthew Elliott is a member of the House of Lords and co-author of Prosperity Through Growth (Biteback 2025)

The Government has set itself a noble ambition: to get Britain working and move two million more people into jobs.

That is a goal every one of us should share. We should, therefore, welcome the news that Ministers have finally blinked on Day One rights.

By abandoning the plan to give full unfair dismissal rights from the very first day of employment, and instead accepting the need for adequate probation periods, the Government has avoided an immediate catastrophe. This U-turn is a testament to Peers across the House of Lords who have compelled the Government to change course, and the business groups like the Jobs Foundation that have long warned about the devastating impact of these proposals.

It’s also a win for workers across the country, especially those with spotty CVs or no prior experience, who employers will now be more able to take a chance on.

The tragedy is that despite this welcome outbreak of common sense, the Government’s direction of travel remains dangerously counterproductive. Unemployment is rising, and without a radical rethink, it is going to get even worse. Businesses are already reeling from a double blow. The rise in National Insurance has made employing people significantly more expensive, while the further increase in the National Minimum Wage announced in the Budget will further tighten margins, especially for small firms in retail, hospitality and care.

And even in spite of the U-turn on day one rights, the Employment Rights Bill will add a third burden, making it riskier and costlier to hire.

At first glance, the Bill sounds noble too. Who could object to fair treatment, secure work and decent pay? Yet the legislation now before Parliament still includes dangerous provisions such as full sick leave from Day One. For a Government that has recently highlighted the urgency of boosting employment levels of the long-term sick in Sir Charlie Mayfield’s Keep Britain Working review, the prospect of a new employee immediately going on sick leave will be a significant barrier to recruitment of those with health conditions.

To add, the Government’s own figures put the cost of the reforms at up to £5 billion a year, a bill that will fall on the very businesses expected to deliver the jobs and growth the country needs.

In our new book, Prosperity Through Growth, which I have co-authored with Dr Arthur B. Laffer, Lord Michael Hintze and Douglas McWilliams, we show how such policies backfire. “Most policies that in theory ‘help’ employees,” we write, “also discourage employers from hiring employees, especially those in more marginal groups.” The supposed benefits to those in work come at the expense of the non-hires, the people locked out of employment altogether.

That is not abstract theory; it is what we have seen across Europe for decades. In many continental economies, rigid labour markets designed to “protect” workers have instead locked millions out of work. Britain, by contrast, has thrived on flexibility, the ability of firms to adapt, take risks and bring new people into the labour market.

As Tony Blair reminded us, when we spoke to him for the book, that flexibility was one of the key reforms that underpinned Britain’s success under both Thatcher and New Labour. Blair made clear that the flexibility which set Britain apart must be preserved, and that the Government will have to find a way out of implementing the Employment Rights Bill because it risks re-regulating the labour market and making it harder to hire and fire.

Our analysis in Prosperity Through Growth quantifies exactly what is at stake. If the UK were to match Australia’s labour-market flexibility, GDP per capita could be 1.9 per cent higher. Matching high-performing Far Eastern economies could raise it by between 4.6 and 5.1 per cent. These are massive long-term gains, the reward for policies that make it easier to create jobs, not harder.

The measures linked to that flexibility include shorter notice periods and redundancy costs, higher participation in the labour force and fewer restrictions on overtime. While copying Far Eastern labour laws may be a step too far, there is no reason Britain cannot follow the pragmatic, pro-enterprise approach of our Australian friends.

Yet the Employment Rights Bill moves in the opposite direction. Lord Simon Wolfson, Chief Executive of Next, summed up business frustration when he told us: “The big problem with regulation is adapting to new regulation. Stemming the flow of it would be enormously beneficial.” Every new rule, however well-intentioned, saps confidence and diverts resources from growth.

The Government insists the reforms will raise productivity. But productivity rises when firms invest in people and technology, not when they spend their margins on lawyers. Prosperity depends on enterprise, innovation and work, the very forces this Bill constrains.

Britain’s challenge is not a shortage of employment rights but a shortage of business confidence. The surest way to make work pay is to make work plentiful. The House of Lords has done its job by forcing a necessary rethink. It is now up to the Government to listen to the screeching brakes of the economy and rethink the rest.