The Beecroft Report should not be ignored

Adrian Beecroft’s suggestions to lift some of the burden which employment regulation places on business deserve a fuller consideration than they appear to be getting from the government. The proposals are serious, are practical rather than ideological, and have clearly benefited from expert advice.

The proposal to abolish the concept of unfair dismissal is a bold one. The plan is to introduce ‘no-fault dismissal’, compensated at the same rate as redundancy. As I suggested in an earlier blog post, this proposal probably needs more detailed work if it is to avoid pitfalls such as claims that it is discriminatory or a way round EU rules on consultation over redundancy. And new contracts protecting their position would no doubt be written for individuals or groups of workers with sufficient bargaining power, as was the case before Geoffrey Howe introduced the concept of unfair dismissal under Edward Heath.

Nevertheless such radicalism could have a salutary effect on productivity in some areas, particularly in the public sector, and by removing the threat of unfair dismissal (and particularly constructive dismissal) claims, would produce greater certainty for employers. Uncertainty about the meaning and scope of badly-drafted employment law is one of the prime reasons for the growth of tribunal claims.

Liberal Democrats have been scathing about the view that reducing employment protection will lead to more jobs being created. While it is fair to say that the short-run evidence on this is ambiguous, it is well established in the literature that employment protection benefits ‘insiders’ at the expense of ‘outsiders’, and restricts opportunities for young people in particular to enter lasting jobs. At a time when youth unemployment is a huge concern, this is an important consideration.

Very small ‘micro-businesses’, with less than ten employees, are said to be inhibited from taking on workers by the fear that they will not easily be able to dismiss poor performers. While Mr Beecroft’s proposals will not make dismissal costless for employers, it will reduce the cost and uncertainty. Over time this might be expected to make taking on staff more attractive.

This would be even more likely if the government adopted Mr Beecroft’s suggestions for making micro-businesses exempt from some legislative requirements (for example, automatic enrolment for pensions), and able to opt out of others (flexible parental leave).

The Beecroft Report’s recognition that very small businesses are qualitatively different from larger enterprises (in matters such as ambition, experience and administrative skills) is very welcome. This recognition has been behind some of the labour market reforms successfully introduced in Germany. Critics argue that exemptions and opt-outs will create a ‘spike’ in firm sizes, with owners reluctant to grow beyond, for example, ten employees. While this is a danger which needs to be carefully thought through, we should bear in mind that we already have such a spike at zero employees. Arguably taking on the first employee is the highest hurdle of all: there are three and a half million one-person outfits which might be tempted to take someone on in a more liberal framework.

Amongst other sensible suggestions made in the report are changes to the work permit system (which is very irksome for small businesses), the restriction of requirements for equal pay audits, the abolition of the Gangmasters Licensing Authority (set up as a kneejerk reaction to a tragedy at Morecambe and working poorly), shorter periods of consultation over redundancies, and a removal of ‘gold plating’ from some European directives (such as TUPE).

He also makes a good case for simplifying employment agency regulations and scrapping the Employment Agency Standards Inspectorate.

It is a pity that Mr Beecroft’s draft proposals for going slowly on implementing flexible working and scrapping some regulations on employment of children were redacted by a nervous business department.

But what is left remains too important to be rubbished in the manner that the Liberal Democrats and the Opposition seem to be doing. In private, politicians of all parties will admit that much labour law in Britain and the EU is ill-thought-out, rarely achieves its stated goals, protects vested interests and is costly for employers and thus restricts employment. In public, however, they don’t seem prepared to do anything significant about it. 

Len has put his finger on the key point about the Beecroft proposal for 'no fault' dismissal. The aim is to benefit 'outsiders' who are not in the 'workforce', though seeking work -- even if it may mean reducing somewhat the protections for 'insiders'. The aim is to encourage potential (small) employers to take the risk of hiring new workers, without having to worry too much about possibly huge legal expenses and penalties if things go wrong. Is there hard evidence that it will 'work'? Probably not; but since the intention is to encourage growth, perhaps this is a risk that is worth taking. In recent days we have heard boasts from politicians (including the Business Secretary) that our labour regulations are already the most flexible anywhere (one can almost hear the refrain 'the envy of the world' echoing down the corridors of bureaucracy). That is unforgiveable complacency. Governments have allowed our economy to become grossly over-burdened and, in our present emergency -- for it is nothing less -- they really do need to consider radical steps to allow the porivate sector to improve matters.
Well, I must say that the Beecroft report strikes me as rather modest by IEA standards! Far too timid for you all, surely? Lord Harris would not approve. On a more serious note, the Beecroft report really should be ignored, as the report is based around ideology and assertion rather than any substantial empirical evidence. Let us start with the laughable assertion that if the Beecroft reforms are adopted, we can expect 5% increase in GDP growth. I haven't seen any evidence to support this, nor any explaination of the methodology/mathematics used to arrive at this growth rate. If the proposals and methodology for this report were presented to NIESR for a funding grant they'd honestly be laughed right out of the door. If I remember correctly the OECD scores the UK 3rd out of all major economies for having the weakest employment protection laws (USA and Canada are first and second respectively). I strongly suspect that marginal employment-growth would hardly increase if Beecroft's proposals were adopted, and that there are far more effective ways of chasing higher employment than fiddling with employment law. Other components of the labour market such as the effectiveness of the government's 'job centres' and the payment of unemployment benefits, offer far more potential for meaningful reform and decreasing unemployment (see Prof Nickell: Unemployment in the OECD Since the 1960s. What Do We Know?). The 'gains' to be had from liberalising employment law are simply nonsensical when the gravest problem facing the UK economy at the moment is on the demand-side of the economy, not the supply side. Focus on raising the final outlook for demand, and hey presto: firms will start having an incentive to invest that £750 billion cash which they possess. If this means government using a fiscal stimulus package then so be it. I think Paul Krugman and Joe Stiglitz have demolished the false preaching of Prof Robert Barro that the medium term fiscal multiplier is negative and somehow manages to destroy jobs! Finally, I suspect that employment protection laws actually have a counter-cyclical effect insofar as they act as a layoff-tax and could well prevent firms from engaging in what the IMF's Olivier Blanchard dubs 'inefficiently high' level of layoffs. Remember: it's the state (and ultimately the tax payer) who coughs up for unemployment benefits, managers don't have to worry about this social cost when bringing the axe down on people's jobs. The greatest factor inefficiency is always unemployment!

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