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Introduction

Hardly a day goes by without some media story about the growing burden of employment regulation and how this is stifling business and adversely affecting the UK’s economic position. Employer representatives routinely and with increasing vehemence lambast either the Government or the European Commission for increasing the 'burden of regulation.'

Here is Digby Jones, Director General of the CBI:

Our flexibility has been steadily eroded by ever increasing regulation and there is still more to come onto the statute book. We now face a real danger of our advantage being destroyed and there are clear signals that firms will go elsewhere if they are burdened with more legislation

There is absolutely no room for complacency on this issue. The threat is not so much that jobs will go to France and Germany but to India, China and Brazil. The government must resist pressures to regulate further, much of which is coming from Europe and from trade unions [1] .

This report argues that 'anti-red tape' rhetoric of this kind is essentially bogus. The international evidence is very persuasive and shows that the UK still has a very lightly regulated labour market with low levels of business taxation. Countries with more regulated labour markets have better employment performance, higher productivity and higher levels of prosperity.

The CBI may fulminate against regulation but they have been very reluctant to identify which regulations introduced since 1997 they would like to see repealed. Should the government abandon the national minimum wage, equal rights for part-time workers or the entitlement to four weeks paid annual leave? Are the CBI arguing that falls in real wages are needed to allow the UK to compete with low wage producers in the developing world?

Much of the business argument amounts to little more than a cry of pain that after twenty years of deregulation the present government has established some minimum standards in the labour market. The CBI’s so-called burdens on business are nothing more than safeguards for the most vulnerable employees against the worst excesses of bad employment practice.

It is also implicit in the CBI’s argument that nations are battling 'head to head' in competition for their share of world trade. This means that there is explicit regime competition between nations who can do little more than offer the lowest taxes and the lightest regulation to attract footloose multinational capital. That this is nonsense should be clear to anybody who gives the issue a moment’s thought. UK businesses will never be able to compete on labour costs with nations in the developing world - or with the EU accession countries in Central and Eastern Europe. Nor should they. The UK’s continued prosperity depends not on low labour costs and deregulation but a sustained increase in investment in people and capital stock, a determined effort to improve our innovation record and a focus on developing and disseminating best practice. Progress on these dimensions is not inhibited by the modest level of regulation that currently prevails in the UK - indeed, it might be said that the anti-red tape rhetoric is deliberately designed to distract attention from the wider failures of British management.

The eminent US economist Paul Krugman has demolished the essentially flawed nature of the notion of national competitiveness [2] . His argument is that it is misleading to think about the international economy as an arena where competition takes place between nations. This will lead to bad policy choices and ultimately to trade wars. In reality it is individual firms that compete in international markets where the attractiveness of the goods and services they offer and the ability to sell to customers overseas are determined more by exchange rates than by national taxation or regulatory regimes. Krugman’s summary of the argument is brutal:

So, let’s start telling the truth: competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous [3] .

Adair Turner, former Director General of the CBI, has expressed a similar view:

By 1995 the CBI had carved out a name for itself as an advocate of competitiveness: in becoming its Director-General, in a sense I became the high priest of a cult whose beliefs I thought rather confused…Every issue - energy tax, parental leave, planning guidance on house building, corporation tax levels, trade union law, workplace parking charges, or the rights of part-time workers - could be given a competitiveness spin whether or not the real arguments were related to international competition [4] .

It is rising productivity that drives rising prosperity - and determines too whether real wages will rise. The CBI would be better advised to look to improving the performance of their member companies than continually blame the government for imposing intolerable burdens on business.

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