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The story of Britain’s labour market over the past decade or so could be summed up as “quantity over quality”. Plenty of jobs have been created and unemployment has remained pretty low. At the same time, wage growth has been weak, productivity anaemic and an underbelly of insecure work has persisted.
It makes sense, then, that the new Labour government wants to focus on job quality. There is a strong case for some of their proposed reforms, such as new rules to dissuade employers from piling too much insecurity on to the shoulders of low-paid staff. More than half of full-time low-paid workers are given less than a week’s notice of their schedule, and 15 per cent less than 24 hours, according to a survey by the Living Wage Foundation. It is hard to build a life on a job like that. But while it’s easy to complain about the UK’s “quantity over quality” labour market, the real test for Labour will be whether it can improve the latter without squandering the former.
Ministers like to say cheerily that what is good for workers is good for business. But let’s get real. It is perfectly reasonable to argue that something is the right thing to do, and might even benefit the economy in the long run, while also acknowledging that it will increase employers’ labour costs in the short run. In an ideal world, a government introducing a slew of new rules (there are 28 reforms in the employment rights bill) would try to soften the impact on employers, perhaps by lowering payroll taxes at the same time.
We are not in an ideal world. The government has opted to increase employers’ national insurance contributions from 13.8 to 15 per cent and reduce the earnings threshold at which they become due from £9,100 to just £5,000.
Admittedly, Labour didn’t have a lot of good options — it needed to raise tax and had ruled out the other avenues in its manifesto. And it has, at least, shielded smaller business by increasing the employment allowance.
Even so, the result is that the government is making it more expensive to employ people, especially low-paid ones, at the same time as its employment reforms will pull in exactly the same direction. Oh, and the minimum wage is also rising by 6.7 per cent (16 per cent for 18 to 20-year-olds). According to the Institute for Fiscal Studies, the cost of employing a full-time worker on the minimum wage is set to increase by 8 per cent next year, based on their salary and employer NICs. For a part-timer, the increase will be 11 per cent.
The question is how employers will react. On the bright side, if the recent history of their response to the rising minimum wage is any guide, they will mostly absorb the cost in profits or pass it on in prices. But surveys already hint at some signs of strain with this approach: more employers this year said they had reached the limit of what they could pass through in prices, and there was an upturn in those saying they had made redundancies or reduced recruitment, albeit from a low level.
Michael Stull, managing director for ManpowerGroup UK, one of the UK’s biggest employment agencies, told me hiring was already “soft across the board” in low-paid sectors such as retail and hospitality. Companies were “looking for ways to reduce staff — it could be lower services, lower hours, wherever they can reduce some of those costs”.
The other possibility is that more employers will turn to independent contractors or supposedly self-employed workers in sectors such as hairdressing, construction and the arts. The tax system already incentivises this business model, and those incentives will increase with higher employer NICs. Hellen Ward, managing director of the Richard Ward Hair & Metrospa, which has 90 employees, said there had been “a massive sway towards rent-a-chair and self-employment” already since the pandemic — a trend she thought would only increase.
It would be a great shame if — by the time Labour’s new employment rights are implemented — there are fewer employees around to benefit from them. But will we even know if that’s where it’s heading? Troublingly, the official labour market statistics are currently so unreliable, due to low sampling sizes, that we lack rigorous and timely information on what’s happening, especially with the self-employed.
Of course, Britain’s jobs market has defied the pessimists many times before. And big policy interventions are always, to some extent, a leap in the dark. But it has to be said that Labour is taking several leaps at once, and it is even darker than usual.