The red tape delusion: Why deregulation won’t solve the jobs crisis

By Stewart Lansley

For 30 years, economic policy has been driven by the idea that markets are best. In Britain this has meant the creation of one of the least regulated labour markets amongst developed economies, with a limited role for unions and weak workplace protection by international standards.

Dismantling workplace regulations, it was claimed, would transform Britain’s economy, create more jobs, and bring an end to economic turbulence. It has not worked out like that. The last 30 years have brought three deep recessions – in the early 1980s, the early 1990s and in 2008-9. In sharp contrast, the 20 years from 1950, a time of extensive economic regulation, brought only one very mild and short-lived recession in 1961, when output fell by only 0.2%.

The flexible labour market ushered in with great fanfare from the early 1980s has not only brought more economic instability, it has had a very poor record on job creation. Between 1979 and 1997, at the height of economic liberalisation, the number of jobs available in the private sector actually fell, by over 100,000. No economic miracle there. Jobs were being created, but only as a result of public sector activity. From 1979 to 2007, the public sector created more jobs than the private sector.

Adherents of flexible labour markets have constantly warned that excessive interference would have draconian consequences. Yet Labour’s modest increases in intervention have all made positive contributions to economic and social performance. The minimum wage, it was claimed, would kill jobs and make small firms unviable. Yet the empirical evidence is clear – the national minimum wage, introduced in 1999, has been a remarkable success story, putting a floor under wages without the dire employment consequences predicted by its opponents. Business organisations claimed the minimum wage would cost a million jobs. In fact, low paid sectors dominated by the minimum wage have been among the fastest areas of employment growth since 1999.

Other measures introduced since 1997 to strengthen protection at work have helped women back into work and encouraged people to stay in the same job and build their skills.

Although Britain is still one of the least regulated of the advanced economies, a powerful business lobby has been at work in recent months demanding the scaling back of Britain’s existing regulations and the weakening of the minimum wage structure.

Yet this flies in the face of the large body of empirical evidence about the impact of different forms of intervention. What this shows is that in many circumstances trade unions have positive economic effects, that responsible bargaining systems are associated with lower unemployment and that active labour market strategies can make a substantial difference to the prospects of the long term unemployed.

A number of European countries have both highly interventionist policies and a strong record on employment generation. The countries with the best economic and social records of the last two decades are the ‘flexicurity’ countries – Denmark, the Netherlands, Norway, Finland and Sweden – which have strong collective bargaining, high levels of employment protection and generous unemployment benefits accompanied by stringent job search requirements. These countries have not only achieved better social outcomes than the UK, with less earnings inequality and less in-work poverty, but also high employment and growth rates. The last thing Britain needs is to return to the years of full-blooded deregulation.

This post is based on Stewart’s new pamphlet ‘The Red Tape Delusion: Why Deregulation Won’t Solve the Jobs Crisis‘, published by ToUChstone.