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The UK and Europe compared

The international evidence suggests there is no systematic link between employment regulation and either job generation or unemployment. A review of OECD research into the links between employment regulation and labour market performance was published in 2001 [11] . This shows that 'employment legislation does not, by itself, appear to explain differences in employment and unemployment across Europe'. Turning to unemployment, the OECD also emphasises that "employment protection legislation has no significant associations with overall unemployment once other factors are taken into account". The tenuous nature of these relationships between labour market regulations is stressed in the Labour Market Trends review. Its main conclusion is that 'it appears more important that the range and type of legislation adopted in a particular country is appropriate and works well with the other labour market institutions and culture in that country'.

This has not stopped critics making simplistic links between higher levels of regulation in the Eurozone economies and their performance on unemployment and unemployment compared with the UK. Red tape it is said is strangling the creation of new jobs. However, a review of the facts suggests that this is highly misleading.

• Between 1961 and 1990 the rate of job creation in the UK and the Eurozone economies has been the same, but in the 1990s the rate of job creation in the UK fell behind the Eurozone average;

• The poor UK performance in the 1990s was entirely because of the huge job losses in the first half of the decade - since then job creation rates in the UK have come back into line with the Eurozone average;

• Job creation rates in the US have been consistently higher than in the UK and the Eurozone, but in the second half of the 1990s job creation speeded up in the Eurozone and slowed down in the United States: latest forecasts show stronger job growth in the Eurozone over the period 2001 to2004 than in the US.

Job creation rates compared 1961-2004

Sources: EU Commission 2002 (European Economy No 4 (annex table 2) and No. 5, annex table 27).

• We saw no improvement in our relative unemployment performance during the years of deregulation, privatisation, and declining collective bargaining between 1980 and 1995. In the 1960s and 1970s UK unemployment was lower than in the economies than went on to form the current Eurozone, but between 1980 and 1995 the average annual unemployment rate was higher in the UK than in the Eurozone. Only in the second half of the 1990s has the gap widened significantly between UK and average Eurozone unemployment rates, a period when labour market regulation in the UK was increasing.

Unemployment performance compared 1961-2004

Sources: EU Commission 2002 (European Economy No 4 (annex table 3) and No. 5, annex table 28).

• Critics have nonetheless claimed that the 'Thatcherite' labour market 'reforms' of the 1980s were still a big success, but that they only came into their own in recent years because it take time for individuals, firms and institutions to change their ways. This argument was not made at the time. Like monetarism, it was argued that after a few years of unavoidably painful adjustments, the economic land of milk and honey would be reached.

• Moreover, it is implausible that individuals faced with big cuts in unemployment benefits or firms freed from the 'constraints' of collective bargaining and regulation would have taken ten years to wake up to the fact. It is also not obvious why the effects of deregulating the labour market suddenly kick-in during a period when employment protections have been strengthened, a nation minimum wage has been established, and more rather than fewer firms are recognising trade unions.

• However, falling UK unemployment in the 1990s only tells part of the story. The UK labour market has always had a significant number of working age people - mainly women - who move in and out of the active labour market depending on the availability of jobs. In the first half of the 1990s the numbers increased as the then government moved people off the claimant count onto longer term benefits and the lack of any effective support meant that the growing number of lone parents were effectively locked out of the labour market. Between 1993 and 1997 the numbers of inactive who wanted work went up by 11 per cent while the number of people counted as ILO unemployed fell by 28 per cent, and the numbers claiming unemployment benefit on the claimant count fell by 39 per cent. Since 1997 the number of inactive who want a job have been stabilised but so far it has proved difficult to reduce the total significantly.

• In 2000 about 27 per cent of the working age population in Britain who were classified as 'inactive' (not in work or actively seeking work at the time of the survey) said they would like a job. The equivalent figure across the Eurozone economies was just 5 per cent. The TUC estimates that once the inactive who want work are included, the apparent advantage the UK has in lower measured unemployment disappears. The UK’s want work rate was 12.4 per cent against the Eurozone average of 12.8 per cent. As measured unemployment has changed relatively little since then we have no reason to think that today’s 'want work' rates for the UK and the Eurozone have changed significantly.

European 'want work' rates compared in 2000

Notes: Eurozone in 2000 (excluding Greece). Working age population all 15-64. 'Want work' rate is ILO unemployed and inactive who want a job as a share of economically active (employed and ILO unemployed) plus inactive who want a job.

Source: Eurostat, European Labour Force Survey 2000.

What these comparisons tell us is that the deregulated UK labour market secured no lasting advantage over Europe in terms of either job creation or unemployment rates over the period 1980 to 1995. Better performance since 1995 has been associated with the UK labour market moving closer to the European norm rather than further away. And even this better performance in terms of open unemployment has not been sufficient to reverse the huge problems of labour market exclusion and wage inequality in the UK, part of the long term price that 'Thatcherite' labour market reforms exacted on the more vulnerable.

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