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Philip Booth: Scrapping the "default retirement age" is another nail in the coffin of freedom of contract

Philip Booth 2010 Professor Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs.

Another nail was hammered in the coffin of freedom of contract today when the Government confirmed that it was scrapping what it calls the "default retirement age". The "default retirement age" allowed employers and employees to freely agree a retirement age as long as that age was not below 65.

The idea that employers and employees should be allowed to sign contracts of employment with agreed retirement ages written into them is regarded by the coalition as a relic of the days when contracts of employment were free agreements between employers and employees. The late twentieth century saw contracts of employment being written by governments, with jobs having some kind of property right entitlement to those who are lucky enough to have them.

The concept of the freely-agreed retirement age has been undermined over the last few years and will now be scrapped. Once you have hired somebody, you are stuck with them for life unless you go through complex procedures of dismissal (by showing the employee is no longer capable) or redundancy. Any dismissal on grounds of incapability will be very vulnerable to tribunal challenge on grounds of age discrimination. Firms with large HR bureaucracies might be able to manage these processes – though at the expense of such bureaucracies becoming still larger and more powerful – but smaller firms, as ever, will bear a greater proportionate burden. It will be a nice earner for employment lawyers too.

But what government ministers do not seem to understand is that employment regulation harms the worker more than anybody else. For a given level of productivity, if the government improves one part of the employment package in favour of the employee then other parts will worsen. It may well be the case that the risks of employing some individuals with particular profiles under the new regime can no longer be justified and thus they remain unemployed.

We should have particular sympathy for those who are made redundant in their late 50s or early 60s who try a career change. Take, for example, somebody trying to move from banking to teaching in a business school. The risks to the employer here are huge. The individual may well have the relevant knowledge but the application of that knowledge to teaching will be pretty much untested. At the moment, he could be taken on in the sure knowledge that after a few years he could be let go at the agreed retirement age. Under the new laws, I suspect that he would only be hired on a self-employed basis which is much more risky. The employment prospects of the individual decline and the risks for the employee increase.

It will, of course, be those who have non-standard and risky profiles that will suffer most. Indeed, modern governments have hailed the recent growth in self employment as a success. Unfortunately, much of this growth may well arise from the greater difficulties of individuals obtaining contracts of employment because of the “protection” they would be given.

The Government suggests that this measure gives employees more freedom. It clearly gives them less freedom. At the moment employees can work for the two-thirds of businesses that do not have agreed retirement ages or for the one third that do. In the future, older employees – if they can get jobs at all – will only be able to work for employees who do not have a retirement age. The government talks as if current employment law somehow reduces people’s freedom to work beyond a given age. This is entirely untrue. If older people have the skills that employers value they can still, of course, be employed: nobody currently prevents this. But, as people get older, people’s skills will change and they may need to change employer. These new rules make it more difficult for an existing employer to let an employee go and for a new employer to take the risk of hiring an older person.

As a coda, it should be added that the focus of this debate on the retirement age is unfortunate. We need a wider debate. Subject to the terms and conditions of their contracts, employers and employees should be able to bring their relationship to an end whenever they wish. Employment relationships should be governed by agreements and not by laws, lawyers and politicians. At the moment, some firms choose a particular age at which they can decide to terminate the contract of employment. Even that freedom will now be denied them.

The biggest losers from the erosion of freedom of contract in the labour market are those potential employees who are the riskiest prospects for employers. Those with non-standard backgrounds, those who have been out of the labour market for some time and so on. Labour market regulation is not a policy for social inclusion. We used to demonstrate that by looking abroad: sadly, we are increasingly seeing the results of employment protection regulation at home.

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