Let's end talk of a 'lost generation' and make it easier for the private sector to create jobs

Today’s figures show the risk of not prioritising job creation in the private sector. Time is of the essence

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A recent campaign outside a Job Centre in London
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Ryan Bourne
On 16 November 2011 11:26

Today’s unemployment figures are depressing, particularly for young people.

Now 21.9 percent of 16-24 year olds are jobless and overall unemployment is at its highest level since August 1994. What’s worse, the International Labour Organisation has predicted that unemployment in advanced countries will not return to its pre-crisis levels until 2016.

There are of course a multitude of factors behind the current trend. Unemployment tends to be a lagging indicator – and much of Europe is still mired in financial crises. But often overlooked is the increasingly uncompetitive tax and regulatory environments that UK businesses are operating.

As I’ve mentioned before, we’ve tumbled from having the 4th most competitive tax system in the world in 1997, to the 94th today. Likewise, we now find ourselves 83 of 142 on the regulatory burden on business.

Employment regulation – both domestically generated, and from the EU – is very problematic, especially for small businesses. In fact, it has swollen six times in size over the past thirty years.

In 2011, British business will spend £112 billion to comply with the administrative requirements – the equivalent of 7.9 percent of Gross Domestic Product, or the entire output of a country the size of Singapore. And firms face a bill for a further £22.9 billion of employment legislation between now and 2015.

If the UK is to be serious about growth, then a change in attitude towards this is clearly needed - quickly. As Dominic Raab MP argues in his CPS Pointmaker today, regulation should not merely be viewed by the administrative cost it generates.

In reality, it increases the cost of employment – thus cutting its supply. In other words, stringent employment legislation trades-off the rights of the unemployed in favour of the rights of those fortunate enough to have a job.

How can Government policy change this? In Raab’s paper, titled ‘Escaping the Strait Jacket,’ ten reforms to employment legislation are suggested to both boost job creation and ease the burden on business (particularly SMEs).

The policies include reforms to remove specific regulations from small businesses, to smooth worker dispute resolution and to renegotiate or opt out of current EU directives that the UK is party to.

Let’s take the case of small businesses. The number of jobs created by firms with 50 employees or less has declined by around 300,000 in 2009 and 2010. One-third of members of the Federation of Small Businesses cite the regulatory burden as the biggest barrier to their business expanding.

Though I’m loath to suggest the Government should assist particular sectors, it makes sense to exempt these small businesses and start-ups from the current multitude of legislation. These businesses cannot afford large Human Resources departments to keep pace with the latest UK or EU requirements. Nor can they afford to pay for their staff to enjoy some of the more generous – and less essential – aspects of the regulatory regime.

They should be exempt from extensions to request flexible working, the right to request time off for training, and the requirement to engage in pension auto-enrolment.

And perhaps more controversially, they should be exempt from Minimum Wage legislation for workers under the age of 21. Canadian research has shown a minimum wage greater than 45 percent of the average wage hurts the employment prospects of low earners. For 18-21 year olds in the UK, the minimum wage is 65 percent of the average for their age group, and for 16-18 year olds it is 76 percent.

With youth unemployment at a record high, suspending the minimum wage for those under the age of 21 who are working for small businesses would encourage employers to take the risk of hiring youngsters.

Another key area is reform of ‘unfair dismissal’. What can be done about an underperforming employee without invoking significant risk for the employer?

The Beecroft report called for the abolition of unfair dismissal and the introduction of “Compensated No Fault Dismissal”, where employers would be allowed to sack unproductive staff with basic redundancy pay and notice.

It was argued that this would create jobs - if employers have clearer powers to dismiss underperforming or uncommitted workers, more of them would take a chance on hiring more staff, with employees able to move on without reputational damage.

Simple in theory, but it now looks impossible to implement politically. A more pragmatic approach could now be to run “no fault” dismissal in parallel with unfair dismissal, with both applying after a worker has been employed for two years.

This would still allow for an experienced employee to makes a claim for being sacked unfairly. However, the definition of fair dismissal would be widened to encompass performance.

In area after area, Raab’s proposals seek to rebalance towards job creation, which will have a greater social benefit than any other government policy. Increased deposits and modest tribunal fees can be used to minimise vexatious employment tribunal claims – encouraging firms to take on more staff; registrars should be used to vet claims and alternative dispute resolution should be encouraged to ease the burden of tribunal costs on employers.

Furthermore, employers should be able to hold ‘protected conversations’ with older workers to enable flexibility after the removal of the Default Retirement Age.

And then there’s the EU, where some of the most damaging employment regulations have originated. Raab argues that in any future negotiation, the UK must seek reform of TUPE and complete opt-outs from both the Agency Workers and the Working Time Directives.

It’s a bold and comprehensive package of reforms. But today’s figures show the risk of not prioritising job creation in the private sector. Time is of the essence.

Ryan Bourne is the Economic and Statistical Researcher at the Centre for Policy Studies. He tweets as @RyanCPS 

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