The New Statesman’s rolling politics blog

RSS

Zombie economics: Why the right are wrong about regulation and jobs

Abandoning basic principles of fairness has more to do with ideology than with good economics.

Just what should be done about unemployment, and in particular, youth unemployment? The right of the Conservative Party, most recently exemplified by Liam Fox's list of demands for the 2012 Budget, have a very simply answer: deregulate the labour market. And even commentators claiming to be on the left (George Eaton in the New Statesman) have suggested that the youth minimum wage should be frozen if the Low Pay Commission concludes that this would reduce youth unemployment.

What is most surprising perhaps is that these arguments should gain such currency at a time when the market fundamentalist model from which they draw inspiration has manifestly failed. The demand for light touch regulation of financial services (and indeed all markets) is what got us into this mess in the first place. The level of hypocrisy is staggering: senior executives must have access to undeserved colossal bonuses and salaries (because that's how the global market works apparently), but the most vulnerable in the labour market must see their wages cut and employment protection weakened.

The Tory right and their unwitting supporters on the left are essentially making zombie arguments. They have been defeated by evidence and experience but refuse to lie down and die. To begin with, the UK has one of the most lightly regulated labour markets of any major economy in the developed world. Only the USA has less protection for workers. Indeed, on almost every regulatory indicator that one could imagine, the UK emerges as a "liberal" economy. Despite the endless whining from the CBI and the small business lobby there is really very red tape left to cut. Of course, businesses -- and the Conservative Party -- always prefer less to more regulation. That is their ideological default setting. But the UK has now reached the point where another assault on employment rights or health and safety legislation will begin to remove necessary protections. David Cameron's own review, supervised by the Swedish academic Ragnar Lofstedt, concluded that there was no case for radically altering or stripping back current health and safety regulations, which he described as "fit for purpose". He also failed to find that EU regulations were in any sense gold-plated when transposed into UK law.

No doubt Fox and his acolytes will continue to assert that sweeping away employment protection could still deliver a significant jobs boost. They would say that this is merely common sense: making it easier to fire people will obviously encourage employers to recruit new workers. Yet countries with more regulated labour markets (most notably the Nordics) enjoyed employment records just as good as the UK's during the boom years. And Germany, with its supposedly sclerotic labour market, weathered the recession with lower unemployment than the USA. The most comprehensive assessment of the relationship between employment protection legislation and jobs was published by the OECD in 2006, with findings that run counter to the orthodox prescriptions of the right: careful analysis could establish no causal relationship between the strength of employment law and jobs performance over the course of the economic cycle.

Perhaps the Conservatives would benefit from looking at what happened on their watch in the 1980s and in the early period of New Labour. When the qualifying period for unfair dismissal protection was increased from one to two years, unemployment continued to rise. And when New Labour cut the qualifying period to one year, unemployment fell.

The case for freezing the youth minimum wage might appear to have a stronger foundation. It is clear that youth unemployment is too high, that the risk of a lost generation is real and that action is needed. Moreover, the international evidence also shows that applying the full minimum wage at the age of 18 can have a negative impact on youth unemployment. For example, in France, orthodox studies have shown that minimum wage increases youth unemployment in the range of 0.1-0.2 per cent -- although even the strongest minimum wage sceptic would have to admit that this is a very small effect. A similar analysis of the US experience suggests that teenage (rather than youth) unemployment may be 2-3 per cent higher as a result of the Federal minimum wage. Yet other studies point in the opposite direction. In their classic Myth and Measurement: The New Economics of the Minimum Wage, David Card and Alan Krueger found no negative impact on teenage employment from the Federal minimum wage increases implemented in the 1990-91 recession. The Netherlands implemented significant minimum wage cuts for young workers in the early 1980s during a very severe recession with no positive impact on jobs. And in the UK, removing young workers from wages councils' protection in 1986 did not produce the fall in youth unemployment anticipated by Tory ministers.

Perhaps the best interpretation of these conflicting studies is that youth minimum wages need to be handled with care. There is a strong case for specific lower rates for young workers and an equally strong case that cuts in youth minimum wages have no positive employment effects. Freezing or cutting the youth minimum wage is precisely the wrong policy to apply in an economy where the real problem is a deficiency of demand. Moreover, it suggests that the government is more than willing to abandon basic principles of fairness when the going gets tough, for reasons that have more to do with ideology than good economics. A government that was really concerned about youth unemployment would be more focused on a short-term fiscal stimulus and the reintroduction of a youth employment guarantee than tinkering with the minimum wage regime.

A cursory glance at the evidence suggests that the right are just wrong about regulation and jobs. The left should be confident in making the contrary argument and must ignore those siren voices encouraging us to accept the standard economic model. "Fairness in tough times" should be the mantra. There is no case for making the low paid and vulnerable pay the price for the excesses of those at the top.

David Coats is a research fellow at the Smith Institute

12 issues for £12