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Sam Gyimah MP: Relaxing labour regulations is only one part of the package to create jobs

Sam Gyimah is the MP for East Surrey

Screen shot 2012-05-22 at 07.58.40Business is back in the dock.  And the outright hostility to the Beecroft proposal for ‘no fault dismissals with compensation’ highlights how deeply ingrained suspicions of business (the organisations with the profit motive) are in some quarters.  Yet it is businesses that will drive our recovery.

No smart employer would want to gain a reputation for firing as quickly as they hire. As anyone who has run a business knows, attracting and retaining talent is the most time consuming and costly part of the job. Recruitment fees for a new employee can easily run to 25% of the first year salary, after which the employee has to be trained and given at least three months, on full pay, to bed in to the new role. So before most employees have added value to their new company, the would-be employer has incurred significant costs just to have them on the payroll.  Having been through the trouble of assembling a team, again smart employers put in place perks, training opportunities and team bonding activities because they realise that people are the greatest asset of any business.  In fact, the job insecurity for employees in a hire-and-fire culture means that most employees will gravitate towards companies that offer better pay and employment protection.

So what do we mean when we say we need more flexibility?  Hiring is an incredibly risky process, especially for small businesses. The fewer employees you have, the higher the stakes are for each new addition, because people tend to be one of the largest costs to a business. Too often, what appears to be a good fit at interview can turn out not to be the perfect match for both sides. If businesses do not have the confidence that they can take tough decisions without fear of a protracted employment tribunal, they will be more cautious than they need to be with every new hire. Counter-intuitive though it may seem, greater flexibility reduces the risk for employers to hire. That is why flexibility in labour markets is essential to growth.

Yet the international evidence demonstrates that successful labour markets cannot be created by relaxing hire and fire regulation alone. In Germany, educational reforms and a strong apprenticeship culture, combined with cutting the cost of employing young people through the creation of regulation-light ‘mini-jobs’, have kept youth unemployment low in spite of the financial crisis. Denmark, a social democratic country renowned for ‘fairness’, ranks first in the World Economic Forum rankings for ease of hire and fire and low redundancy costs, but under the ‘flexicurity’ model there are strong incentives to help people back into work if they lose their jobs. 1 in 4 workers in Denmark change jobs every year, and yet this is seen as a positive feature of the economic landscape by most Danes. And the light-touch employment regulations of the US work because of the unique conditions that have historically allowed the country to be an engine of job creation.

What can Britain take away from these international examples? We need a package of reforms alongside relaxing labour laws. Raising the skills level of British employees is key – A more qualified and better skilled workforce is essential to our long-term competitiveness.  People who are better skilled have more options in the job market in good as well as bad times.  Incentivising the growth of start-ups and small businesses is vital, because in too many of our towns there are just one or two large employers. And welfare-to-work needs to be linked to our labour market and growth policies.

Flexibility that works for both the employer and the employee has to take account of the modern economy in which there is no such thing as a job for life. Most people will change career or company several times in their life.  In some industries, such as the media, working flexibly as a temporary worker, freelancer or self-employed contractor has replaced permanent work as the norm. That is why employment legislation like the EU Agency Workers Directive, which gives temporary employment the characteristics of an inflexible permanent job, goes against the grain of a flexible modern economy. The pace of technological change means that some people will see the industries in which they started their careers disappear over time. Acquiring new skills is more essential than ever.  A modern flexible labour market has to reflect this new reality. 
Despite all of these changes, if there is one guiding principle for the package of reforms needed to make us competitive, it is the appropriateness of our employment legislation for businesses at each stage of development. For a new start-up with 5 employees, the cost of pension auto-enrolment, for example, can have a real impact on the costs and development of the business.

An exemption from some employment regulation is not a cost-free option for small businesses either.  To compete with larger businesses which offer the pay, perks and protection, smaller businesses might have to compensate by offering their employees a greater stake in the business for example, which is why the rules around employee ownership should be reviewed.   Clearly, freeing up our Labour market needs tackling from several angles, which is why focusing on the “no fault dismissal” proposals on their own is a mistake.


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