Making Work Pay is Good Economics

The UK has experienced the longest pay squeeze in modern history, a proliferation of insecure work and stagnant economic growth. This has developed alongside poor employment protection. UK labour standards are generally less protective than other developed economies. Economic theories promoting highly flexible labour markets have now been widely discredited. The evidence is all around us that labour market deregulation leads to inequality and low-quality jobs with low pay and poor job satisfaction. The government’s Employment Rights Bill seeks to reverse these trends, in line with the latest evidence.

The consequences of labour market deregulation

The UK has some of the highest levels of pay inequality in the developed world, with steep increases since the 1980s. Only a minority of people are satisfied with the availability of secure, well-paying local jobs. Inequality is also reflected in the experiences of marginalized groups, with Black workers, disabled workers, and women bearing the brunt of insecure work and declining living standards.

Health outcomes reveal some of the most concerning impacts of excessive labour market deregulation. Poor quality jobs can be more damaging to health than unemployment, with 1.7 million workers in Great Britain experiencing health conditions caused or worsened by their job. Those in insecure work are much more likely to experience work-related stress, taking a toll on their mental and physical health and leading to costs for the NHS and other public services.

A turnaround in the economic consensus

The case for labour market flexibility relied heavily on the idea of trade-offs between a strong economy and better labour market protections. However, falling real wages and the rise of insecure work have been bad for living standards and the economy. Emerging empirical evidence shows that boosting employment rights can improve living standards, increase productivity, and promote better economic outcomes. Economists are increasingly of the view that “economic prosperity and social justice go hand in hand” as expressed by Chancellor Rachel Reeves. 

The shift in economic consensus is reflected in the government’s Employment Rights Bill, which aims to deliver an important uplift in employment rights.  This landmark legislation will benefit millions of workers, especially those trapped in insecure jobs. The official impact assessment estimates modest costs at less than £5bn annually, equivalent to less than 0.4% of employment costs. However, initial TUC analysis suggests that these costs will be outweighed by estimated benefits of between £5bn-£22bn, due to reduced stress, increased well-being, better labour market compliance, and reduced industrial conflict and disputes.

The shifting consensus is also reflected in the views of international institutions such as the Organisation for Economic Cooperation and Development (OECD) and the World Bank. The OECD Jobs Strategy of 1994 played an instrumental role in promoting labour market deregulation. It argued that governments should weaken employment protections and weaken collective bargaining with the aim of creating flexible labour markets. But by its 2018 Jobs Strategy the OECD had decidedly shifted its recommendations. It now concluded that countries which promoted job quality and inclusive labour markets performed better than those which were focussed solely on flexibility. This turnaround has been documented in detail by Evans and Spriggs, who were closely engaged with OECD discussions from a trade union perspective.

What the evidence shows

The newer evidence shows that labour market protections lead to improved economic outcomes and a more equitable share of income between labour and capital. Research indicates that labour protections can increase employment, reduce unemployment, and improve productivity while ensuring that the proceeds are shared with workers. This fits with findings from an international meta-analysis of 111 studies, which finds that trade unions have positive impacts on productivity overall.

Evidence from the success of minimum wage policy is also instructive. The minimum wage has been successful at raising wages, despite strong opposition when it was introduced. Opponents said that higher wages would mean less employment. This did not happen – instead workers were paid the minimum wage and employment levels grew. This suggests that overly powerful employers had been using their disproportionate market power to hold down pay. This is called monopsony, where employers with a lot of market power hold down wages artificially (i.e. below market levels). Another example is the NHS, where pay restraint for healthcare staff has fuelled a recruitment crisis. Under monopsony conditions, a market intervention which raises pay and conditions leads to more employment, not less. The solution: power needs to be rebalanced from employers to workers.

Improved labour market protections can deliver a stronger economy

The case for labour market deregulation has been discredited over the past four and a half decades. The evidence shows that reductions in employment protection have not produced good economic outcomes. Instead, we have seen a growth in poor quality jobs and little growth in productivity or output.

There has been a sea-change in the consensus around labour market protections, with influential institutions and economists changing their minds. The government’s Employment Rights Bill reflects the latest evidence and puts it into practice. This is an opportunity to adopt a more inclusive labour market model, helping secure the benefits that stem from better employment relations, wage growth, improved productivity, and improved consumer confidence and higher demand.

In retrospect, the case for labour market flexibility appears ideological and poorly evidenced. Sticking with this approach would lock in poor outcomes and a low road approach to the economy. Instead, we should take heed of the evidence and realize the economic gains of making work pay. 

Read TUC's report Making work pay is good economics