“A Price Worth Paying”

In Wednesday’s Prime Minister’s Questions, Ed Miliband led with the Beecroft report (anyone got a link to the final published report?) into employment law, focusing in on one phrase

“some people may be dismissed simply because their employer doesn’t like them, but that is a price worth paying…”.

Adrian Beecroft may be a successful entrepreneur and (as is spat through clenched teeth by Labour) venture capitalist, but he clearly has no comprehension of the resonance of that phrase within the Labour movement. After Margaret Thatcher said unemployment was a “price worth paying” to bring down inflation, this has been a standard debating tic you’ll hear over and over whenever you talk economics with a lefty.

Watch miliminor in the commons on Wednesday. He’s like a fifth form debater who thinks he’s won because he’s able to deploy his favourite sound-bite. Cameron deals with it well enough, but the Labour benches felt very smug and happy nonetheless – deploying “price worth paying” was like giving the pigs behind him their swill.

To me though, this line belies the immaturity at the heart of left-wing economics: a refusal to accept the existence of trade-offs. If you increase employment rights, you increase the risk and cost of hiring, therefore you increase unemployment. Taken to its extremes, you get Italy or Spain, where half the workers are generously protected insiders and everyone else is struggling to find any jobs at all. Any lever pulled by Government in the economy will have positive and negative effects. High public spending tends (the relationship appears to be small but certainly significant) to reduce growth over the long term. The higher the debt burden, the greater the effect on Growth, especially when it gets much above 100% of GDP. Is future stagnation a “price worth paying” for public spending now? Is inflation which lays waste living standards, a price worth paying for temporary full employment?

Taken to its extremes, you get the belief that if only the Government spent and borrowed more, we could avoid recessions entirely. However in open economies (like the UK is one of the most open) with high debt burdens (The UK’s debt burden is about average for a developed nation – which is to say ‘high’) and a floating currency (like the UK) “stimulus” spending doesn’t work very well. So this belief in “growth” or “austerity” as a binary choice is, of course, nonsense. Of course, every Government, anywhere and always would generate growth, if it could. You can keep inflating the balloon with debt, and eventually it goes ‘POP!’. Of course, Labour likes to pretend that you can have your high spending and job protection along with (debt financed) growth. They just hope the ‘POP!’ happens on someone else’s watch.

Adrian Beecroft is arguing for compensated no-fault dismissals, reducing the risk (and perhaps more importantly the PERCEIVED risk) of hiring, in order to stimulate the job market. At present, if you want to get rid of someone, you have to jump through a number of hoops with tribunals and so-on and as a result, borderline staff are dismissed at 11 months BEFORE they get any rights. Therefore they don’t get a second chance. Because all this costs money, management time and so on, people, at the margin are not hired. I accept that at present, firing people is pretty easy, but it still requires cost, time and unpleasantness. Rather than paying for a tribunal and lawyer, wouldn’t the person getting fired rather have the money spent compensating him?

a notice period of one week for every year of employment up to a maximum of twelve weeks together with a tax-free payment related to the employee’s salary, age and years of service, up to a maximum of £12,000. This process and level of compensation would be applied to Compensated No Fault Dismissal unless the employee’s contract of employment would give a higher payment in those circumstances. While the principle of matching the payment for redundancy (which is not the fault of the employee) might seem generous for dismissal for poor performance (which arguably is usually the fault of the employee), such generosity would reward loyalty and would make the proposal more acceptable to employees and unions.

Isn’t that better than arguing the toss in a tribunal which the employee almost always loses? And imagine winning – you return to an job in which the employer has made it perfectly clear he doesn’t want to be employing you.  Do you really want to work (especially in a small company) with someone who “simply doesn’t like you”? Better all round if companies can employ whomsoever they want. “Fairness” involving some money up front (I would actually argue for more generous terms than the above) would be better than miserable, protected, unprofitable employment?

So what of the effect on the job market as a whole? The evidence suggests the rate of people losing their jobs is rather constant over the business cycle. It is the rate of hiring that affects unemployment rates, not the number of people getting fired. Anything to help people hire will help bring down unemployment. At the margin, especially in tough economic times, every little helps. The best job protection is a tight and dynamic labour market. No fault, compensated dismissal will reduce the risk, and perceived risk especially to small employers of hiring staff. No-one should pretend this is a magic bullet, but “Nasty” it is not.

So. The question I would ask Ed Miliband is “Is unemployment a “price worth paying” for job security?”.

8 replies
  1. PaintingWithNumbers
    PaintingWithNumbers says:

    Beecroft is proposing that dismissed employees should not be entitled to know the reason for their dismissal. Whatever the rights of otherwise of on-the-spot dismissal, don't you think individuals should be told why they are being fired so they can improve in the future?

    Secondly, employment protection only kicks in after 2 years now, not the one year as suggested by your blog.

    Thirdly, the evidence that employment protection legislation inhibits employers from recruiting does not exist. The most significant inhibitor of recruitment is business confidence. If employers foresee a rocky time ahead then they defer recruitment until better times are foreseen.

  2. Malcolm Bracken
    Malcolm Bracken says:

    "evidence that employment protection legislation inhibits employers from recruiting does not exist"

    Not true: Merely the first paper to turn up on Google Scholar. To do with disabled job protection in the USA "… had a negative effect on the employment of disabled men of all working ages and disabled women under age 40. The effects appear to be larger in medium size firms, possibly because small firms were exempt from the ADA. The effects are also larger in states where there have been more ADA-related discrimination charges. Estimates of effects on hiring and firing suggest the ADA reduced hiring of the disabled…"

    So employment protection is not free, is it? If it were, why not ban employers from firing anyone, ever?

  3. PaintingWithNumbers
    PaintingWithNumbers says:

    Erm,…, but we live and work in the UK, not the USA ! There is no evidence that UK employment protection legislation inhibits recruitment.

    In any case, I would not trust all that can be read on the world wide web. Is it properly peer reviewed academic research, do you know?

  4. Malcolm Bracken
    Malcolm Bracken says:

    I love the sound of the furious backpedalling of the terminally wrong.

    Who gives a fuck whether it's peer reviewed or not, or whether it's from the USA. You increase job protection, you increase the risk and cost of hiring at the margin.

    At no point do I claim the effect is large, but it is significant. This is especially true of the low-skilled, young and at times of economic turmoil. Every little helps.

  5. Jane
    Jane says:

    You've almost convinced me, and I'm about as knee-jerkingly worker-favouring as they come. Your argument is definitely sound, as it applies to small firms and largely reasonable managers.

    Accepting that anecdote + anecdote + anecdote ≠ data, what about places like the ex-company (that must not be named lest it be brought back from the dead, but that may be recognised by some who now do telephony work for R. B.) which had a terrible reputation as a place to work for. Mightn't it have been even worse in the absence of employee protection law?

    Can we instead do the thing where small firms are exempt – or do we already do that?

  6. Malcolm Bracken
    Malcolm Bracken says:

    Problem is if small firms are exempt, they will not be able to attract the best people.

    Best let employers employ whomsoever they choose. If you can't retain good staff, you won't be very successful.

    It's darwinian!

  7. cuffleyburgers
    cuffleyburgers says:

    @P.w.N – I think the evidence you are looking for is easily found in Spain where it is virtually impossible to sack anyone and unemployment is almost always approx. 20%

    Jackart here is righ on the money – what Beecroft is proposing is a much better deal for workers than the existing system.

    It really is infantile to believe that job protection will lead to lower unemployment.

    And sadly typical of the level of debate in Parliament that nobody seems actualy to seek to explain facts such as these and instead deal in soundbites and schoolboy insults (on both sides)


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