Employment protection & jobs

Tim welcomes the proposal to scrap workers’ protection against unfair dismissal:

It will increase job creation…The harder it is to fire people the less likely people are to take someone on in the first place.

This is common sense.

And common sense is often wrong. Empirical work has struggled to find a link between employment protection laws and unemployment. For example, the OECD has found (pdf) that:

There appears to be little or no association between employment protection legislation strictness and overall unemployment

although it did find that such laws raise long-term unemployment.

And Stephen Nickell found (pdf) that employment protection laws were "negligible and completely insignificant” as a cause of cross-country differences in unemployment in 1980s and early 90s.

So, why is Tim’s intuition at odds with the facts?

It’s because there are a couple of mechanisms operating in the other direction.

If there were no employment protection at all, workers would gain less from staying with the same firm for a long time. Ceteris paribus, they would therefore have more incentive to leave. This would have two effects:

1. To retain staff, employers might have to pay more. This would tend to reduce employment. To put this in a way Tim would prefer, the incidence of employment protection laws falls upon workers in the form of lower wages.

2. Workers would have less incentive to invest in firm-specific skills. This would tend to reduce the firm’s efficiency and hence prevent it growing.

You might think these are small effects. Maybe. But so is Tim’s; firms - being over-optimistic about their ability to spot talent - don’t hire workers thinking there’s a chance they’ll be skivers or no-marks.

Because of these offsetting mechanisms, some research (pdf) has found “an inverse U relationship between employment protection and economic growth”:

From the point of view of per capita growth of GDP…employment protection in the early 1990s was too low in countries like Australia, Canada, Denmark, Ireland, Switzerland, the UK and the US

It is, therefore, unlikely that making it easier for firms to sack workers will reduce unemployment - and very unlikely that it will reduce it much. If scrapping employment protection is your best idea for creating jobs, you don’t really have any ideas.

Comments

[Nick]

Why not have a flexible system that allows for different levels of employment protection, freely entered into by both parties? Or perhaps, more to the point, why don't we have a flexible system that allows for such a negotiation, as otherwise one would hope that voluntary institutions would lead to this sort of development. Is the legal system too restrictive? Are firms just institutionally stupid?

Or is this really a public sector/private sector divide with too little protection in the private sector and too much in the public?

[fake]

*There appears to be little or no association between employment protection legislation strictness and overall unemployment*

Surely this is impossible to really measure.

When you measure unemployment in the millions, fifty thousand is a statistical blip.

It could be argued that the benefit is to small to measure, say this measure "creates" an extra 50k jobs, particularly for small business (the more risk averse employers?).

50k is nothing, you can't measure it.

I would argue that this alone wouldn't do much, and there are a number of other such red tape barriers that singularly would each have little effect, but a number of them would have a large cumulative effect.

The problem is that I could be talking bollocks, no one can really say, because statistical if we are talking of X measure = +50k jobs, it's to small a number to measure statistical from a pool of several million.

[Paolo]

There is a third effect: animal spirits. If employees feel more precaurious they will spend less which will do no good to economic growth. This in turn will worsen employers expectations which tend to reduce further unemployement. This basic macro loop is missing totally in the debate.
By the same token, I don't buy the argument that employers hold on on employing people in time of economic growth, animal spirits suggest they will be more then confident they'll have no need to sack staff; which again is likely to be a self-fullfilling propecy.

You remember Chris we argued about the distinction between the confidence fairy and animal spirits.....this is a case in point!

The only way how this policy could be expansionary is if we think of the UK as the only country playing Reaganomics within the single market, thus attracting capital away from other EU partners....but as I argued this is shortsighted as it will lead to a race to the bottom where every country will try to undercut each other on social policies....and everyone is worse off as a result.

[gastro george]

It's interesting to compare Tim's cut-throat attitude to employees with that taken by the more enlightened employers - like, say, Honda in Swindon.

After the tsunami, rather than sack people (which they could have done), they preserved their workforce, and offered them reduced hours instead, with a guarantee of overtime later in the year to make up for lost production.

Unlike the Anglo-Saxon model, they see employment as a partnership. And with a skilled and committed workforce, they see productivity benefits. This posturing over EPL is just a right-wing nutter's sideshow, like a referendum on EU membership.

[Keith]

That the whole Government has no idea how to improve the economy is no surprise to me and I require no proof!

What the attempt by tory and lib dem alike to find a gimmick or two shows is how bad the collective ruling class is including "NEw" Labour. No ideas at all, no leadership. With the lot of them fixated on the idea that the existing financial system should be preserved at all costs. The costs falling on the 95 per cent not in the public school Oxbridge "elite" of ex marxists ( the millipedes ) or scary Libertarian rich dim wits. It has never occurred to them that impoverishing the masses will merely worsen the economy over time. I assume that is as a result of them only listening to other people like them selves. So much for any of them being "new". Same old rubbish would be more accurate.

[Jim]

@Gastro George: I think you'll find that Honda employ considerably less people at its plant now than they did 4 years ago, before the recession. Yes they did send a lot of workers home on just their basic pay for a number of months, but they also got rid of many agency workers, offered redundancy packages etc. Staff also took a 3% pay cut for a year to help save jobs.

Overall the number of employees is now about 3000, down from over 4500 in 2007, before the crisis.

[Dr Mike]

or, how is a man to spend his money when he does no know whether he will be in work next month?

[anon]

Nick, I agree. Employment protection, like salary, should be a matter of private contracting between workers and firms. There are no obvious externalities and transaction costs would be fairly low in the long run, so there is hardly any case for government involvement.

Paolo, "animal spirits" and demand-side effects more generally, only matter in the short run, and even then only if the BoE doesn't do its job properly. The central bank can offset any shortfall of effective demand, at negligible cost to the economy or government finances.

[Paolo Siciliani]

Anon, really? If the BoE insists on inflating away the debt, disposable income will be squeezed even further, given stagnant salaries (+ fear of being sacked if this proposals are implemented), which would ignite a vicious circle, and further depress consumption.....guess this will offset any short term magic effect attributable to QE2.

[anon]

The BoE does not need to "inflate debt away" to any significant degree, actually. (Any such transfer would really be a wash, with loss of real assets being balanced by a corresponding reduction of government liabilities.) Where it can help is by increasing the expected price level, which incents households and firms to increase spending [and investment] from money balances, as well as by affecting bank lending directly. It also boosts investment opportunities and "animal spirits" directly if the economy is in a demand-driven recession, since the monetary authority can only raise prices by increasing AD and market actors react to that.

For the record, I'd agree that avoiding AD shortfall is more important than making it easier to hire and sack workers. But the BoE seems to be doing a fine job of that. Of course there are enduring problems on the supply-side and reforms to address these might help, but labor markets do not seem especially relevant.

[Paolo Siciliani]

What households are you talking about? Those who are already overly indebted trying to puy downs outstanding debt, or those who are just getting by? FTBs trying to save to buy a property, while paying exorbitant rents? Why would expectations of increased prices push all these people to increase spending exactly?
You have read too much of Krugman lately I bet.
It is true that firms sit on lot of cash, but they wont invest unless they see real-life households spending more. Those households who have monetary balances are not going to spend more anyway. It all goes into gilts even if they give negative returns.
I mean, we have had inflation above 4% for almost two years now, where is the evidence of the effects you are talking about, do you think people do not expect higher prices in the future? Do you think this is not enough? Inflation up, salaries stagnant, consumer confidence down, consumption down, managers expectations down....get real!
Krugman also says you can imagine an economy reaching full employement even when the entire economy works for the top 1% who claim all the income, as long as you do a good job at increasing expected price level. Yeah, dream on!

[A]

This would have been a good time to bang the workplace democracy drum.

"So, why is Tim's intuition at odds with the facts?"

Because he has drunk the libertarian kool-aid.

[Rick]

Nick - just to be clear, there is no difference between employment law for the private and public sectors. Public sector workers enjoy no more legal protection than anyone else.

The fact that, in general, fewer are fired and it takes longer to fire them is purely because of the way the law is interpreted and applied by most (but not all) public sector organisations.

I've noticed recently that, because of the financial constraints many public bodies are now under, the traditional reluctance to fire people is starting to disappear!

[anon]

"I mean, we have had inflation above 4% for almost two years now, where is the evidence of the effects you are talking about?"

The 4% inflation number is somewhat misleading, since much of that is due to changes in VAT and rises in commodity prices. These are obviously bad, but they're unrelated to the BoE boosting demand persay. (At the same time, the BoE has avoided the mistake of tightening in order to keep inflation near 2%, unlike the ECB.)

An economy where everyone is working for the top 1% will have lots of problems, most likely including structural unemployment because workers will have little opportunity for production. But demand-side recessions are understood as a cyclical, short-run concern affecting the economy as a whole. When Krugman states that such an economy could "reach full employment", he's making a rather technical point about this distinction.

[Paolo Siciliani]

Anon, you haven't answer my point at all. You are ducking the question by refuging in doctrinal nonsense. This is a demand-side recession that is not cyclical, not short-run but structural and long-run, given that salaries have been stagnating for almost two decades. Got it? Yes man, there is something as long-run structural demand-side depression, sorry to bring this to you.
If the situation has got so bad with 4% inflation due to a remarkable succession of exogenous factors (BTW, you tell me how soaring energy prices can be considered exogenous at all, since they are due to lack of competition and/or hoarding cash ex-ante to justify investing in future technologies), I just cannot imagine what could happen with your recipe for a BoE driven increase in prices to permanently raise expectations...just give us a break would you.
The only reason the BoE is striving to keep rates low is to prevent sending households with variable rates mortgages underwater, period. All the rest is frankly too much of an intellectual exercise for me to stomach.