we must begin by deregulating the labour market. Political objections must be overridden. It is too difficult to hire and fire and too expensive to take on new employees.
My chart shows the point. It plots labour productivity in 2015 against a measure of employment protections in 2013-14: I’m taking a simple average of four OECD indices of protections again dismissals and regulation of temporary work.
It’s clear that, across 33 countries for which we have data, there is no correlation. It’s also clear that this fact is robust to outliers. Yes, the US has weak regulation and high productivity. But the UK and New Zealand have weak regulation and moderate productivity, which France and Belgium have high regulation but also high productivity.
You might think this is counter-intuitive. Common sense says that if firms can easily fire people then workers’ incentives to work hard are sharpened by a greater fear of the sack, whilst companies can more easily adjust their workforce to changes in market conditions.
These mechanisms, however, are offset by others, for example:
- If people fear the sack, they’ll not invest in job-specific skills but rather in general ones that make them attractive to future employers. They might also spend less time working and more time looking for a new job.
- A lack of protection will encourage people to change jobs more often, as it’s better to jump than be pushed. This can reduce productivity, simply because new workers often take time to adapt to their new company’s clients, IT systems and to new colleagues.
- If firms know they can fire at will they’ll devote less effort to screening or training, and so there might be worse matches between jobs and workers.
Deregulation might be good for bad employers who want to be petty tyrants, but it has no obvious aggregate benefit.
I don’t say this in the hope of changing anybody’s mind. As Jonathan Swift said, “it is useless to attempt to reason a man out of a thing he was never reasoned into.” And as Nick points out, Brexiters are a cult that’s immune to reason. But things are true whether or not you believe them.