Thursday, 24 May 2012

Making it easier to fire people: no answer at all

The Report on Employment Law commissioned by the Government, and delivered by Adrian Beecroft (above) has just been published. It's split the government between free-market Conservatives and Lib Dems (such as the Business Secretary Vince Cable) that Beecroft has since decried as 'socialists'. A great deal of political blood has been shed and will be shed about this - mainly on the Coalition side. You can read the whole thing here (PDF), if you've got a spare hour or so.

But I just emitted a weary sigh. No-one listens to economic historians, of course. But if they did, any second-year undergraduate could immedately come up with three reasons why the report's just wrong. 

Number one, there's a massive great hole where demand should be. No amount of mucking about with any labour market laws (or, indeed, planning laws) is going to change that situation any time soon. And as Vince Cable pointed out, Beecroft's proposals will do nothing at all to boost demand - especially consumer demand - and may even make things worse.

Number two, Britain doesn't have a labour productivity problem. It stands in the world top twenty in any labour flexibility league table you care to look at. It's just not true that inflexible labour markets are holding the UK back, a key reason why unemployment hasn't risen as much in this recession as in previous downturns. Honda in Swindon reacted to the recession by going on short-time working and shutting down for two months at a time, not by laying everyone off. Britain probably did have a labour productivity problem in the 1970s (though it was more evident in services than manufacturing). Today? Nope.

Number three, and most important, whoever said that making it easier to hire and fire people made the labour market more flexible and more efficient in any case? There is a mountain of evidence that making labour more expensive can lead to demand gains in the short term and efficiency gains in the long run, since wage rises mean that employers will economise on employment and invest in plant, machinery and new techniques (this also helps to explain why productivity and wages can fall at the same time). Ask the German car industry.

Beecroft Report? In the bin, please.

1 comment:

  1. YES!!!!!!!!!!!!

    Have been waiting for an economist to point out the huge hole in businesses logic.

    "We need to be able to fire at will so that we can hire people"????????????
    If you want to hire people hire them. All a "flexible" labour market of the type envisaged by Beecroft (brandishes the garlic and crucifix) is that a company can upsticks and bugger off to a cheaper labour location.