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The Red Tape Delusion: Why deregulation won't solve the jobs crisis

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The Red Tape Delusion: Why Deregulation Won’t Solve the Jobs Crisis challenges the neo-liberal assumption that economic success is contingent upon weakly regulated labour markets. Based on an extensive evidence review of the economic literature, it demonstrates that the case for unfettered free markets has been badly discredited and that fairer rights for workers are compatible with economic success – as well as bringing far better social outcomes. The Red Tape Delusion proves that despite the siren voices from the business lobby, fair regulation is an essential part of modern labour markets. If economic policy was based on evidence, the UK would be making immediate moves towards a new model – promoting both growth and fairness.

Executive Summary

For most of the last three decades, the conventional wisdom among economists and policy makers has been that free and flexible labour markets deliver greatly superior economic outcomes than regulated ones. So influential was this view that from the late 1970s the UK embarked on a sustained path of deregulation and privatisation aimed at reducing the role of government and shifting the balance of power from the state and organised labour in favour of business.

Although Labour governments from 1997 signed up to the principle of flexible labour markets, they also introduced a number of measures - such as the minimum wage, statutory recognition rights for trade unions and improved maternity and paternity leave - which have brought greater workforce protection. Despite these additional measures, however, Britain still has one of the least regulated labour markets among the developed economies.

According to their advocates, allowing labour markets to self-correct without state interference brings higher levels of employment and growth, encourages entrepreneurialism and wealth creation and prevents boom and bust. Indeed, a number of powerful business voices from the Confederation of British Industry to the British Chamber of Commerce are now calling for existing regulations to be cut back still further.

Such calls have come despite the fact that the orthodox free labour market case has been badly discredited in recent years. This is in part because after more than 20 years of experimentation with labour market flexibility, especially in the UK and the US, there is now a substantial body of empirical evidence that demonstrates that flexible markets have not been nearly as successful as their adherents have claimed. In many ways, the policies implemented in the name of neo-liberalism have had seriously detrimental economic outcomes.

Such is the importance of these findings that in 2006 the Organisation for Economic Co-operation and Development (OECD) - formerly one of the most influential advocates of freer labour markets - moved to distance itself from the deregulation school. In its 2006 Jobs Study, the organisation acknowledged that countries with very different levels of regulation had experienced equal levels of success in generating employment. The orthodox account was, for example, unable to explain why a number of European nations, such as Denmark, the Netherlands and Norway, displayed economic success despite their relatively highly regulated labour markets.

The prescriptions of the neo-liberal school have also been seriously undermined by the economic crisis of the last two years. Indeed the neo-liberal advocates of free markets - a group which still dominates the international economics profession -have long argued that the recession of 2008-09 was an event that could not happen in countries like the United States and the UK which have religiously pursued a deregulated path. As the American economist Robert Lucas, Nobel Laureate and one of the high priests of the new philosophy, declared in 2003, 'the central problem of depression-prevention has been solved, for all practical purposes.'

For the most part the prescriptions of the neo-liberal school do not stand up to detailed scrutiny. In the UK, the introduction of the national minimum wage in 1999 failed to deliver the dire consequences predicted by its critics while the modest reregulation of the British labour market in the last decade has been achieved without detriment to employment creation. Indeed, the impact of the 2008-9 recession on UK nemployment - which has risen by much less than in the early 1980s and 1990s recessions - suggests that the slightly more regulated labour market of the last decade has been working well.

The domestic and international evidence is also that:

• Trade unions have no significant negative consequences for labour market outcomes, and have positive effects in promoting workplace cohesion and social justice.
• Co-ordinated and responsible bargaining systems are associated with lower unemployment while under the right conditions social corporatism works.
• Active labour market policies, if well designed, can make a substantial difference to the employment prospects of the long-term unemployed.
• In-work benefits boost labour supply while redistributing income to low-paid workers.
• Generous unemployment benefits of limited duration (with ongoing social assistance provided for those in need) combined with job search requirements are effective in reducing long term unemployment. The 'one size fits all' model simply doesn't work. A number of European countries have both highly interventionist policies and a strong record on employment generation and unemployment. The evidence is that two quite distinctive models work particularly well. First, the Anglo-Saxon model (including the UK) with its lower unemployment benefits, light touch employment protection, weaker trade unions and more limited collective bargaining. Secondly, the Scandinavian/flexicurity model (including Denmark, the Netherlands, Norway, Finland and Sweden) which is characterised by strong collective bargaining, high levels of employment protection and generous unemployment benefits accompanied by stringent job-search requirements and available for limited durations

Yet while both models achieve similar results in terms of employment and unemployment rates, some Anglo-Saxon countries have experienced considerable economic turbulence in the last two decades and an especially deep recession in 2008-09. Moreover, the flexicurity model is much more successful when it comes to social outcomes and the Anglo-Saxon model is characterised by high earnings inequality and higher levels of in-work poverty. In both the US and the UK, for example, both poverty and inequality have risen sharply from the late 1970s following the adoption of more market-orientated policies. The flexicurity countries have achieved, in contrast, high employment and good growth rates with much lower levels of wage inequality and in-work poverty. Given the strength of the evidence, and the persistence of economic volatility, Britain should start planning moves towards the flexicurity model. Measures should include:

• Development of a new understanding of the positive contribution that unions can make to workplaces and to workplace prosperity, allowing the trade union movement to play a more central role in the major issues of political economy.
• Fairer employment protection legislation to reduce job insecurity and inequality.
• A significant increase in the level of Jobseeker's Allowance to bring it closer to the European average, with the maintenance of job search requirements.
• Strengthened active labour market policies, with large increases in programme investment.

These measures should be carefully implemented and their impact evaluated so that they satisfy the test that they work in the real world. Achieving a fair and successful labour market is dependent upon their implementation.

Briefing document (1,100 words) issued 31 Mar 2010