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David Blanchflower: Slashing employment regulation would do nothing to boost growth

Economic Outlook: The data does not support Liam Fox's contention that job protection regulations are a problem
  • @D_Blanchflower

The economic data for the UK over the last week or so have shown some slight signs of improvement. The public finances look a bit better than many had expected and there was a small rise in retail sales in January. The announcement of an additional £50bn of gilts this month by the MPC will also boost demand.

But the latest Bank of England's agents' report on the economy found that investment and employment intentions all continued to moderate. The growth rate of turnover in business services also slowed further. The agents' scores should be taken seriously as they were good predictors of the recession that was coming in 2008.

Finally, the Office for National Statistics has confirmed the economy shrank by 0.2 per cent in the last three months of 2011, and even revised down its estimates for growth earlier in the year.

There is little evidence, then, that the British economy is about to enter a major growth spurt, and so politicians of various persuasions have been prognosticating on the appropriate strategy for George Osborne to follow in his 21 March Budget to get the economy moving.

I was especially struck by two. The first was by Ed Balls, shadow Chancellor, who has been pushing a five-point plan, which involves an immediate and temporary reversal of VAT that Osborne increased in January 2011 (let's call this plan A). Mr Balls went further last week, arguing that if Mr Osborne didn't like his plan A, he had plans B, C and D that were just as good. For the same amount of money, Mr Balls argued, he could cut the basic rate of income tax by 3p for a year (plan B); raise the income tax personal allowance to more than £10,000 (plan C); or increase tax credits for almost six million working people by about £2,000 (plan D).

Mr Balls certainly has a point when he says "it would be better to cut VAT now – it's fairer and quicker and would help pensioners and others who don't pay income tax. But any substantial tax cuts to help households and stimulate the economy would be better than doing nothing." So the Labour Party is for tax cuts. Good; so am I.

In an interesting article in The Financial Times, the ex-Defence Secretary Liam Fox set out his ideas for growth, some of which I have to say I agree with. The good stuff first. Mr Fox argues for cutting employer's national insurance contributions across the board, which would help to price workers into jobs and is a really good idea. Mr Fox goes on to suggest that if the Chancellor can't go that far, "he should consider targeting such tax cuts on the employment of 16- to 24-year-olds, making them more attractive to employers," which I have been pushing for a long time and is welcome. This is fairer and likely to have a much bigger impact on job creation than cutting the 50p tax rate.

Mr Fox went a step too far then by suggesting that there had been a "debauchery of our currency", whatever that means, plus, to restore Britain's competitiveness, he argued, we must begin deregulating the labour market, because "it is too difficult to hire and fire and too expensive to take on new employees".

No it isn't, and he presented no evidence to back up his claim. It turns out that despite rhetoric like this from the Tory right, the data does not support Mr Fox's contention that job protection regulations are a significant problem in the UK and, if anything, the opposite.

According to the World Bank's Doing Business rankings, the UK ranks seventh in the world for ease of operating out of 183 countries, behind only, in order, Singapore, Hong Kong, New Zealand, the United States, Denmark and Norway.

There is more evidence. The OECD's employment protection index measures the procedures and costs involved in dismissing individuals or groups of workers and the procedures involved in hiring workers on fixed-term or temporary work agency contracts. On this index, which is presented in column 1 of the table above for 21 countries, the UK ranks third, behind only Canada (second) and the US (first) for the states with the lowest employment protection. Italy is 14th, Portugal 18th, Greece 19th and France 20th. No evidence there.

Importantly, there is only a very weak statistical correlation between the degree of employment protection and the increase in unemployment since the onset of recession, which I set as January 2008, through to the most recent figure we have. Germany and the Netherlands have much higher levels of employment protection than the UK, but a much smaller rise in unemployment.

The next to last column presents the proportion of workers who are union members, which is actually negatively correlated with the increase in unemployment or its current level; unions protected jobs in the downturn. So the correlation goes the wrong way. There is also a negative correlation between the level of employment protection and the cumulative growth in GDP between Q1 2008 and Q3 2011 presented in the final column. Incidentally, an OECD report published at the end of last week warned against the dangers of reducing job protections in "bad times", of the sort that the UK economy is experiencing at the moment.

There is zero credible empirical evidence supporting Mr Fox's contention that Britain's economic problems would be fixed by slashing workers' rights. If he or anyone else has such evidence, beyond anecdotes, now is the time to present it. Tax cuts, though, are another matter.