The Imaginary Trade Off Between Workers’ Rights and Growth

The Labour Government’s Employment Rights Bill passed its second reading in the House of Commons last week.

Over recent weeks, various media commentators have considered the bill another tricky ‘trade off’ or a ‘tough choice’ for Labour between workers’ rights and their ‘lodestar’ – the promise of growth.

The policy chair of the Federation of Small Businesses too insisted on the ‘risks these measures pose to the economy, jobs, and wages’; and the press has highlighted the extra cost of £5 billion a year to businesses according to the Government’s own impact assessment.

The Prime Minister and his deputy, on the other hand, focus on the benefits and argue instead that workers’ rights are good for business and pro-growth.

Whatever the risks and extra costs to businesses, our research on labour regulation and populism supports the Government’s view.

In a new study drawing on the Cambridge Centre for Business Research’s Labour Regulation Index we find no basis for the idea of a trade-off between labour rights and growth. On the contrary, strengthening labour rights will be important for the economy…but perhaps more importantly, it is also key to protect our democracy from far-right populism.

The UK has weaker labour laws than the OECD average, lower productivity and a poor record on training and investment.  These trends are interconnected. Over the past forty years, thanks to labour market deregulation, UK employers have become over-reliant on low pay and precarious work to generate profits, when they could have been investing in training and capital goods.  

Deregulation – aka ‘cutting red tape’ –, justified by the need to make labour markets more ‘flexible’, has in fact been highly damaging to ‘UK plc’. 

Competing on the basis of low labour quality is no more sustainable for the national economy than it is for individual firms.  Aligning the UK’s labour laws with the OECD norm should be seen as an essential part of a wider strategy to shift the UK on to a high-wage, high-productivity path – which even previous Conservative governments saw as the way forward.

If productivity increases, meaning that each unit of labour input produces more value in terms of output, doesn’t that mean that there will be fewer jobs? Not necessarily. 

Through higher labour productivity, firms can operate more efficiently and sustainably, so they should grow over the medium to long term. Scaled up, growth across the economy as a whole will be higher if productivity is rising. 

This explains why some studies show employment rising, rather than falling, in those periods when UK labour laws were briefly becoming more protective since the 1970s.

What of investment?  Since the 1970s, wages and salaries as a share of profits have fallen in the UK, with dividends and other returns to capital enjoying a corresponding rise.  Yet this has also been a period of historically low investment in productive capacity. 

Capital has been flowing instead into speculation in shares and real estate, adding to financial instabilities.

Redirecting capital flows to productive uses will not be easy for the UK, but evidence from other countries is that laws raising minimum wages and promoting worker voice, by enhancing labour quality, make such investments more, not less, likely.

Importantly, the argument against labour rights is also politically flawed, because it ignores the impact of having a large number of workers in insecure and bad jobs on democracy.

Research on populism shows that providing people with a job is not sufficient to make them less likely to vote for extreme right parties. What does, is giving them a sense of job security.

Job security in turn requires more, not less labour regulations. Here, the bills’ restriction on ‘fire and rehire’ constitutes a sensible proposal to increase a little bit people’s sense of job security, which is both good for their willingness to invest in their own job-specific skills (and hence increase their productivity) and reduce their status anxiety, which is a key driver of support for the far-right vote.

This is borne out by other countries’ experience. In the context of the extension of the retirement age in France, political scientist Bruno Palier has argued that contrary to the simplistic belief that giving people a job will keep them happy – and hence prevent them from voting for extreme right-wing parties – the effect may be the exact opposite.

If you force people to work for two more years in a job that they hate, for an employer that treats them like a ‘human resource’ rather than like human beings, you may actually increase the number of frustrated people willing to vote for radical right parties. 

In other words, what people want is not just any job, but one where they are treated with respect, that gives them a certain material security, and a sense of self-worth. That is good for democracy, but also for economic productivity.

Rather than a tricky trade-off the Employment Rights Bill constitutes a small step towards that – the much needed economic growth and political stability will follow. If that adds £5 billion a year to a wage bill of £1.2trillion, surely that is a price worth paying for businesses.