The argument that strong employment rights are incompatible with economic growth has long exerted a strong influence on the minds of politicians. The relentless economic difficulties in the EU since 2008 have given fresh impetus to such thoughts – and sparked a sustained attack on workers’ status and protections.
In effect, this is the labour market face of austerity, and it arguably threatens the very recovery it is designed to protect.
One priority for governments in the aftermath of the financial crisis has been to make it easier for employers to dismiss their employees. According to advocates of reform, the logic runs like this. Constraints on dismissal discourage employers from taking on workers, pushing up unemployment, further disadvantaging those most at risk of joblessness (young people, for example), hampering small firms and discouraging investment, innovation and risk-taking.
Governments have therefore reduced severance payments, shortened probationary periods for new employees and diluted dismissal criteria so as to make it easier for employers to dispense with their staff.
Reform deals
This kind of dilution of employment protections has been most apparent in countries that have experienced greatest financial distress since the start of the economic crisis. Shackled to a common interest rate, the ailing countries of the eurozone have been driven to seek “internal devaluations” in order to boost their economies, attempting to drive down labour costs and the level of employment protections.
Some countries – such as Greece and Spain – have been obliged by the “Troika” of the European Commission, European Central Bank and IMF to implement reforms in return for financial assistance intended to ameliorate their sovereign debt crises and stabilise the eurozone. Reforms have been also been widespread among the central European economies. With the exceptions of Romania, Latvia and Hungary, which have requested substantial EU financial support since the start of the crisis, the central European economies have not been subject to direct demands from the Troika.
However, their reforms have been heavily influenced by country-specific recommendations, issued by the European Commission since 2011 and based on annual reviews of the economic performance of each EU member state. Several countries, including France, the Netherlands, Sweden, Lithuania and Slovenia, have received specific recommendations aimed at increasing labour market “flexibility”.
Rights raid
The UK government has escaped this kind of pressure from the European Commission, but has nevertheless cut employment protections. The claim is again that economic growth will follow as a consequence. We have seen an increase in the minimum period of employment service for unfair dismissal claims; a reduction in the minimum consultation period required in cases of large-scale collective redundancies; the introduction of a scheme that permits private sector employers to offer prospective employees a financial stake in their business on the condition that they give up employment rights; and a new fees regime for Employment Tribunals.
It is worth noting that even before these reforms were implemented, the UK already had among the weakest employment protections of any developed economy, as measured by the OECD’s employment protection legislation (EPL) index and the lowest EPL “score” of any OECD member within the European Union.
The erosion of protections for workers represents a sacrifice of social justice considerations to the needs of the economy, but it is far from clear that economic benefits will actually materialise. Empirical evidence amassed over many years from a substantial number of econometric studies suggests that there is no clear cut relationship between employment protections and aggregate unemployment that holds across all economies at all times.
Some international comparisons have suggested a positive relationship between the strength of employment rights and unemployment (particularly long-term unemployment) while others have found that the two are unrelated. Estimates are sensitive to the measures, time periods and methods used in their calculation. There is also a risk of overlooking the role of robust employment protections in preserving jobs during economic downturns. All in all, the “job creation case” for weaker employment rights is far from proven.
Damaging effects
The assault on employment rights might even have detrimental consequences for firms’ ability to innovate. The process serves to undermine the trust, cooperation and worker participation required for the successful introduction of new processes and products. To that extent, the erosion of employment protections would serve to impede rather than stimulate innovation and investment.
Rather than acting as a catalyst for economic recovery, it seems more likely that the recalibration of employment rights will produce a shift in the balance of power at the workplace in favour of employers, emboldening the worst and increasing the vulnerability and insecurity of those they employ.
The UK has already witnessed a collapse in the number of new cases being brought to Employment Tribunals and a substantial expansion of low-paid and insecure forms of employment, such as zero-hours contracts. Increasing employers’ freedom to dismiss workers clearly falls far short of a viable strategy for creating sustainable jobs.