Control: Osborne's missing word

One of the great questions in economics is: who in an economy is best placed to bear risks? Osborne seems to think the answer is: workers. He's asking employees to give up their rights of unfair dismissal and redundancy in exchange for between £2000 and £50,000 of shares in their employer. This plan, he thinks, is "particularly suited to new businesses starting up; and small and medium sized firms."

Such companies, however, are risky. UK data show that, even in good times, around 10% of firms close (pdf) each year. And the risk is even greater for new firms. Alex Coad has estimated from US data that over 20% of new establishments (not quite the same as firms but close enough) die in their first year.

Workers who take up Osborne's offer - or who are forced to do so by employers - thus face a high risk not only of losing their jobs, but of seeing their shares become worthless too. This violates the first rule of investing: don't put all your eggs in one basket.

You might object that the loss of their shares is no problem, because it's the loss of something workers' don't have now.You'd be wrong. In giving up redundancy and dismissal rights, workers in stricken firms not only lose redundancy pay but also the right to a notice period during which they can look for work elsewhere.

So, what is the case for worker ownership?

One is that it can spur workers to work harder - maybe not hard enough to ensure that all firms survive, but sufficiently so to raise aggregate productivity.

The other argument is that ownership is necessary - but not sufficient - for control. And workers' control is a good way of reining in overconfident or rent-seeking bosses, and of mobilizing fragmentary and dispersed knowledge of complex organizations, All good Tories, having read Hayek, should appreciate that centralized planning is a bad idea.

Herein, however, lies a curious omission in Osborne's speech.Although he talked of "new rights of ownership" he did not mention that ownership should entail control. As bank shareholders will tell you, ownership without control is just a way of ensuring you'll be ripped off. Anyone would think Osborne wants workers to suffer a similar fate.

Comments

[Rob]

Effectively, this is a policy designed to increase the formation of risky businesses, presumably on the following assumptions:

1) There are currently businesses which are not being formed, or which are not recruiting employees as early as they could, because of the risks associated with hiring someone.

2) Removing the risks from #1 will lead to more businesses being formed and greater investment in startup businesses because of a perceived increase in the chance of success

3) The benefits which accrue to the winners (employees of risky firms which succeed) outweigh the suffering of the losers (employees of risky firms that fail).

To be honest, I can imagine this policy being fairly successful for small technology startups. The technology job market is sufficiently strong that we're not talking about workers being coerced or duped into taking bad jobs for lack of an alternative; if a worker wants to give up some protections in return for shares, they're really only doing a lesser version of what the firms co-founders (who may be socially similar to them but a few years older) are doing.

For startup tech firms, there's often an implicit expectation that if the firm fails in the first year or two, everyone's out of a job anyway; if the firm survives and prospers, the first few employees will do well from their share options. This policy just formalises this and, by giving an incentive to share options, improves the potential upside for employees in the success scenario without harming them much in the failure scenario.

That said, I have really no idea how this would be applied in the rest of the economy, where such explosive growth is simply not possible, making the tradeoff significantly worse. I'd guess that the argument for employee ownership and control, on efficiency grounds, is much stronger in relatively slow-growing firms.

[Paolo]

The proposal is that any firm of any size could offer this new scheme as the only contractual form for new hires. Accordingly, it could be argued that in the future people would think twice before leaving their (more protected) job. This might worsen labour mobility and create insiders/outsiders split.

[Metatone]

Building on Rob, taking this at face value, the implication is that hiring of people and formation of firms is a root problem for the British economy. We need more startups goes the logic...

Trouble is, from the inside of the startup situation, the big reason firms move to California is not because of employee protection or even employee costs per se - it's a lack of available capital. The UK VC scene is anaemic. If you happen to have an idea in the hobby-horse area of the ex-ARM guy you're in better shape, but otherwise you'll have to fight tooth and nail to get someone interested compared to elsewhere...

[Rob]

Well, there's little question what side of the debate The Economist is on:
http://www.economist.com/node/21559618

[Luis Enrique]

I think that some people might be attracted to the idea of working for risky start-ups if they had a sufficiently tempting equity stake in the business, even without control, and be prepared to forgo some workers rights. These might be people who are reasonably financially secure and confident of their ability to find another job. So a policy that allows risky start-ups to employ such people on such terms, doesn't sound so daft to me. I more have in mind people like software engineers or something here, not badly paid workers in the warehouse. And it should be strictly voluntary.

But that doesn't sound much like the policy Osborne has described, which sounds more like a scandalous attempt to allow all employers to shrug off their responsibilities in return for a measly sum for workers. Although typing that, I realise I haven't read the policy proposal in any detail.

[Rob, that article lists too restrictive labour laws as the third thing holding entrepreneurs back. It does not say anything about Osborne's policy]

[Anonymous]

'Chris said, "The other argument is that ownership is necessary - but not sufficient - for control".

Ownership is neither necessary nor sufficient for control. In co-determined firms, depending on the legislative framework, it is perfectively feasible for worker control without ownership.

In takeovers, it is perfectly possible for a company to control another by acquiring and holding less than 50% of the subsidiary's share capital.

I would suggest that in modern times ownership and control have become quite separate. As further evidence of this, buy some land and try building on it without planning permission.

[Keith]

Gimmicks are all we get at conference time. This is merely one example.

[Frances Coppola]

Luis (and anyone else who is interested)

Treasury's press release on this proposal is here http://www.hm-treasury.gov.uk/press_91_12.htm

Personally I think this is just another gimmick to please the party faithful. I don't see it being a major alternative to protected employment.

Anyone know if it might fall foul of EU employment law?

[Account Deleted]

The BIS press release makes clear that the chief feature of this initiative is the waiving of CGT, not the waiving of employee rights.

The sort of business-folk who moan about the difficulty of firing staff are not likely to be attracted to the partial dilution of control implied by the "owner-employee" model. Though it's possible a lawyer may be able to craft an employment contract in such a way that £2k will be the compensation for a "no fault dismissal", this is pretty much what you might expect to pay for statutory redundancy anyway (£430 p.w. max).

In a startup business, where roles are fluid and there is little track-record, pretty much any dismissal can be presented as a redundancy. If the employee disagrees, they can only claim unfair dismissal if they have been employed for at least 2 years.

The real beneficiaries of this change will be tax avoiders. Startup owners will become owner-employees, with a nominal £50k share issue per owner and no tax on the gains.

[Depository trust company]

You are one straightforward writer. I enjoyed reading your article and taking in all the interesting information. I share your thoughts on many points in this content. This is great.