Do employment laws increase unemployment? #QTWTAIN

James Forsyth in the Spectator reviews the impact that the euro crisis is having both on the EU and on British economic prospects. In the process, he gives us a dose of the purest Shock Doctrine:

This gloomy prospect has one happy result. It means that Cameron and Osborne have the political cover to use it to make changes that would not be possible in normal circumstances.

What are these changes which Cameron and Osborne should now be making? Forsyth identifies two items from the Tory right’s wishlist, the first being employment law:

One early test of the pair’s willingness to act on Britain’s behalf is whether or not they push ahead with the Beecroft Review’s suggestion of altering employment law to do away with unfair dismissal and replace it with redundancy pay based on length of service. This would give both employers and employees far greater certainty. Firms would also be more inclined to hire people if they knew that they could sack them if necessary. The Liberal Democrats have set ­themselves against this idea. But, interestingly, it remains under consideration by No. 10.

The second being an opportunity “to take a scythe to the employment and environmental regulations that are holding back the British economy”.

As regards the first, the idea does seem to have taken hold that employment laws increase unemployment by discouraging employers from taking on staff. The only argument ends up being over whether that is a price worth paying to avoid exploitation of vulnerable workers – and as the Lesser Depression drags on, it becomes harder and harder to argue that it is.

Chris Dillow, however, argues in an important post that the “common sense” assumption that removing employment protection laws will increase employment is incorrect. He quotes an OECD report which found that:

There appears to be little or no association between employment protection legislation strictness and overall unemployment.

Why is this? Dillow argues that it is because, even if reducing employment protection would increase bosses’ willingness to take on new workers, there are mechanisms operating in the other direction:

If there were no employment protection at all, workers would gain less from staying with the same firm for a long time. Ceteris paribus, they would therefore have more incentive to leave. This would have two effects:

1. To retain staff, employers might have to pay more. This would tend to reduce employment. To put this in a way Tim would prefer, the incidence of employment protection laws falls upon workers in the form of lower wages.

2. Workers would have less incentive to invest in firm-specific skills. This would tend to reduce the firm’s efficiency and hence prevent it growing.

Another thought that occurs to me is that reducing employment laws would also increase unionisation. I suspect (and would be interested to know if there is any research supporting this intuition) that one reason for the decline in union membership in recent decades has been the growth in legal protection for employees. People are not as afraid of arbitrary dismissal – and to the extent they are, their assumption is that they would go to a tribunal rather than looking for help from a union. However, if workers lose the right to take their boss to a tribunal for unfair dismissal, then they may be more likely to seek protection through solidarity with the colleagues – that is, unionisation.

This raises another question. I mentioned “Shock Doctrine” in my opening paragraph. While I haven’t read Naomi Klein’s book of that title, I can see the truth in the idea that some may exploit a crisis to further their political and economic ends at the expense of ordinary people. However, there is more than a dash of conspiracy theorism to the term, as it implies a strong degree of conscious and deliberate action.

Most of the employers I come into contact with, though, are not rubbing their hands at the prospect of exploiting the economic crisis to further the interests of “capital” as against “labour”. They are as bewildered, uncertain and afraid of what lies in store as the rest of us – and thus as likely as the rest of us to take refuge in simple, comprehensible ideas that happen to play to their prejudices. “Employment laws are holding us back!” is an example of this, for both employers and for Conservative politicians.

That doesn’t reduce the danger, but to assume bad faith may be to misinterpret the situation – and thus reduce the prospects of effective opposition.

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