It's official: Employment Rights Act will deliver a stronger fairer economy

An updated impact assessment finds that the Employment Rights Act will improve working conditions and job security for 18 million workers, deliver a significant net gain to society, and provide a boost to growth and employment. Our analysis (cited by the business department) shows that benefits are likely to total over £10 billion. 

Costs associated with the Act

Although the potential benefits are huge, much of the public commentary has been fixated on the costs. The revised impact assessment finds that these will be only £1 billion a year, equivalent to just 0.1% of the total UK pay bill. Some have interpreted this as a revision downwards from £5 billion, wrongly suggesting that revisions are due to policy changes. The truth is that the central estimate for costs has always been around £1 billion – in both iterations of the official impact assessment.

The widely quoted £5 billion figure was an unrealistic upper estimate and should never have been treated as a headline figure. It categorised every policy under the Act into one of three cost buckets: small (£0-£10m), medium (£10m-£100m) or large (£100m-£1bn), then added together the upper bounds of each bucket. This means it applied a £1bn cost to any policy estimated to cost between £100m–£1bn. For example, the impact assessment for reforms to sick pay identified costs to business of £480m, but the £1bn upper bound was used in the calculation. Clearly, this highly inflated the likely costs.

The revised assessment rightly places emphasis back on the central estimate of £1bn and clarifies why the upper bound figure was unrealistic. Our own work with Landman Economics (see below) pointed this out, and showed that costs were dwarfed by the benefits.

Benefits identified in the impact assessment

The assessment finds that 18 million workers will directly benefit — up from 15 million in earlier estimates as more detail has been set out on a wider range of measures. Groups set to benefit most include women, disabled workers, and young workers. Key benefits include:

• Sick pay reforms which mean up to 1.3 million low paid workers will now be able to take paid time off when they are sick. This will particularly benefit lower paid women.

• Unfair dismissal protection extended to over 6 million workers who have been with their employer less than two years but more than six months.

• Improved protection from dismissal for pregnant women and new mothers with reductions in unfair dismissals for pregnant women and mums returning from Maternity Leave. 11% of women who have children or are expecting a child have lost a job, or felt forced to leave a job, due to pregnancy or becoming a parent.

• New bereavement leave for around 2.7 million people each year.

• 30,000 more fathers or partners to get paternity leave and 1.5 million parents to gain the right to unpaid parental leave from day one.

• Unpaid holiday pay worth hundreds of millions of pounds will be recovered for workers by the new Fair Work Agency.

The impact assessment also identifies a range of benefits that it was unable to quantify, noting that “if even some of these benefits were realised, the Bill would deliver a significantly positive net impact for society.” To support this point, the assessment references analysis by the TUC and Landman Economics, which estimated several of these benefits. Our analysis found total economic benefits of over £10 billion per year, including:

• Reduced workplace stress: £487 million to £1.5 billion in economic benefits by reducing lost working days.

• Staff well-being: £310 million to £1.6 billion in economic benefits from improved well-being.

• Minimum wage compliance: £42 million to £293 million in economic benefits from better compliance.

• Strikes: £85 million to £256 million in economic benefits by resolving disputes.

• Industrial relations: £2.7bn to £8.1 billion in economic benefits from reduced conflict.

• Labour market participation: £1.3 billion to £4.0 billion in economic benefits by increasing employment for people looking after family or home.

Cost Benefit Analysis

In summary, the benefits will hugely outweigh the costs of this package. The impact assessment confirm that costs will be close to the central estimate of £1 billion rather than the implausible upper limit of £5 billion. This is because of increased confidence in the analysis rather than significant tweaks to policy. The quantified benefits are higher as more policy detail has emerged, and unquantified benefits remain an order of magnitude greater than likely costs. We predict around £10 billion a year compared to £1 billion of costs. The package is set to be significantly net positive for society.

Economic impact

We have long argued that the Employment Rights Act is not only a transformational upgrade to workers’ rights, but is also good economics. The package arrives as economic theories which promoted highly flexible labour markets have become widely discredited. The consequences of failure can be seen all around us in the proliferation of low-quality, low-paid jobs and low job satisfaction for many workers. The latest academic evidence shows that better labour market protections lead to improved economic outcomes and a fairer economy.

The updated impact assessment of the Act confirms this. It concludes that the package will be positive for economic growth and employment. It will lead directly to an estimated 0.04% increase of GDP. It is set to raise employment by “increasing the range of jobs and working patterns that are attractive to workers.” It could also lead to better job matching as workers have more security when starting a new job. It will level the playing field for good employers and drive out business models reliant on exploitative conditions. The Act also has the potential to improve productivity as employers invest rather than rely on cheap and precarious labour. This corresponds with the latest and most comprehensive evidence on the impacts of strengthening labour law.

Conclusion

The evidence is in: stronger rights at work deliver benefits that far outweigh the costs. The Employment Rights Act is a landmark step forwards for workers and signals a shift away from a failed experiment with a low-rights model. The Employment Rights Act will deliver vital common-sense reforms for millions of people across the country. Stronger rights at work are good for workers and employers.

The Act will deliver an estimated £10bn boost to the economy – gains that far outstrip any costs. Britain will now be brought into line with other countries where workers already enjoy better protections. Good employers will also welcome these changes as the Act protects them from competitors whose business models are built on low-paid, insecure employment.

It is now vital the government finishes the job – ensuring workers feel the benefits of all new protections as soon as possible. That means watertight secondary legislation, delivering these new rights fully and without delay and ensuring full implementation of their wider commitments to Make Work Pay.