Over the last fifteen years the UK labour market has undergone extensive reforms which can be stylised as "deregulation". Some aspects of these changes have not been entirely driven by legislation. Amongst developed nations this radical pattern of transformation is perhaps second only to that in New Zealand but a number of countries have pursued a strategy of deregulation to some degree and in this sense one can speak of a new consensus forming. This consensus view has identified unemployment as a problem of the supply side of the economy. It considers European unemployment as "structural" and caused by "interference" in the free workings of the labour market which thus prevents the unemployed from competing for the jobs available and bidding down real wages to market-clearing levels. As the most important interferences in the workings of the labour market the following ones are mentioned:
- Social security systems which provide a safety net and maintain living standards for those who are out of work, reduce the gap in living standards between those in and those out of work, and diminish the incentive to find or keep jobs. Where the safety net is financed by taxes on wages, it also raises total labour costs.
- Minimum wages may price workers out of jobs if set at levels above those prevailing in an unregulated labour market.
- Employment protection legislation, such as restrictions on the ability of employers to hire and fire at will, also raises labour costs, diminishes flexibility and willingness to hire, thus reducing employment.
- Trade unions which raise wages to levels which destroy jobs and reduce productivity and efficiency through restrictive practices.
In this paper, I will use the term labour market deregulation (or simply deregulation) to refer to those policies which aim at reforming social security systems, specifically by reducing benefit provisions, at cutting or abolishing minimum wages, to remove employment protection and at reducing the power of trade unions. Using a single term to refer to a collection of policies which, at least in some aspects, may have very different effects on the labour market, can be misleading. However the common logic behind all these policy recommendations allows us to discuss them usefully together.
Although analyses offer different reasons for the origins of the rise in unemployment, most tend to emphasize that labour market deregulation should be part of the solution. This approach is well-summarized by the recent OECD Jobs Study (OECD, 1994, p.22) which concluded that "wages have significant consequences for employment and unemployment. The process of wage determination is strongly influenced by labour market pressures, social perceptions, legislation and industrial relation systems". The notion of the "Flexible Labour Market" has spread well beyond academic circles or international bodies. However, flexibility is a word open to numerous interpretations. The OECD, therefore, is quite clear about the type of flexibility it seeks as a result of policy reform - wages should be highly sensitive to unemployment (nationally and among workforce groups) and the unemployed should return to work rapidly to avoid a build-up of long-term unemployment (large flows in and out of work). This working definition will be used throughout this paper.
The UK provides an interesting case study in deregulation. The fundamental question is whether labour market efficiency has improved and whether these improvements are worthwhile in terms of their costs in equity. It is often expected that deregulation will lead to greater wage inequality as wages are bid down differentially by unemployment but that lower wages can be offset by improvements in overall equality as unemployment falls. In an exercise such as this, establishing clear cause-and-effect is often problematic and the appropriate benchmark may not always be clear. Should we compare the UK in 1996 with other countries today or with the UK twenty years ago? Both comparisons have merits. Where contradictions arise lies a breeding ground for contentious debate. The bold conclusions of this study are:
1) The recent UK record on unemployment is substantially better than the one of most continental European countries. However, unemployment has not returned to pre-1979 UK levels. But the absence of inflationary pressures at an unemployment level of 8% is an encouraging sign that unemployment can fall below current levels.
2) Wage inequality has virtually exploded. It has grown faster than in any other developed nation except perhaps New Zealand and is higher than at any period in history where comparisons are available.
3) Joblessness by family has not followed the pattern of unemployment. We have seen the proportion of non-pensioneer families with no adult working triple since 1975. The rate of nearly 1 in 5 households without a working adult is higher than in all other European countries, except Ireland and Spain. Furthermore, the number of jobless families is not declining as the economy recovers. Job creation is simply not reaching the neediest families.
4) There has been a profound shift in the levels of men to women in the labour market. Whether in terms of employment, wages or job tenure, the figures for men and women are rapidly converging. Compared to continental Europe, the position of women, the young and the long-term unemployed in the labour market appears to be more equitable.
In terms of a simple model of the trade-off between wage equity and equity among employable groups, the UK example poses two paradoxes. First, wage inequality has increased dramatically while whole families were excluded from the access to employment. This means that overall household income inequality has increased rapidly. The second paradox is that equity across gender, and to a lesser extent age groups, has clearly improved. However, a link exists between these paradoxes. The young and the women are dependent on entry into newly-created (and mostly marginal) jobs and can benefit from the increased instability inherent in such jobs and from the generation of low-paid unstable forms of employment. However, families dependent on social benefits face difficulties in exploiting these opportunities. Such benefits are withdrawn rapidly when people enter work (the marginal rate can be up to 97%) and most severely affect those with low weekly pay rates. Hence we observe job entry increasingly undertaken by those who are second earners, students and others with another source of income rather than by men or women from jobless families. This polarizes work across households and produces wage inequality despite a narrowing of such inequality between genders.
This suggests that the British experiment has had a number of modest successes even though it was accompanied by huge social costs. These social costs mean that government expenditure on social welfare has grown so fast that the government has been unable to reduce taxes despite reductions in expenditure on infrastructure, housing and the like. Clearly anyone concerned about equity-issues or lowering government expenditure would not want to follow the UK experiment wholesale. The trick is to build a framework which stimulates job creation and enables all marginalised groups to accept the work available. In my view this rests on three principles:
1) Genuine minimum standards, including minimum wages are needed. Without them the lower end of the market becomes casualised and sufficiently low-paid, which in turn produces major work incentive problems. On the other hand, regulation that protects or gives power to already powerful groups in the labour market creates serious inequality in access to work. Additionally, the creation of special types of labour exempt from normal regulation is particularly unhelpful. It often tends to reinforce the privileged status of core workers while generating jobs which are unsuitable vehicles for tackling the problem of social exclusion. The Spanish experience with temporary labour contracts is pertinent here.
2) The benefit system needs to take into account that those who take entry-level jobs may require additional help from the welfare state to support their families. Without this type of benefit, adults from jobless families will be the last to take such relatively low-paying entry-level positions.
3) Employment taxes, on both employers and employees, should be progressive to support the creation of new jobs rather than making the already employed work longer hours. Yet the UK system also has numerous large incentives to offer employees short-hour contracts. This is counterproductive.
In section 2 we summarize the UK experience with deregulation since 1979, relating it to the notion of labour market flexibility described by the OECD. Section 3 describes in more detail what has happened to the UK labour market. It highlights the astounding rise in inequality, both in wages and in the distribution of work across families. It also highlights the changing nature of employment with work being increasingly undertaken on part-time or temporary contracts or by the self-employed. This section will also briefly discuss the evidence for improved macro-economic performance in the labour market. Section 4 offers some discussion of why the UK experiment has failed to unequivocally support the de-regulators' reasoning and suggests that even most minimum standards of regulation affect the distribution of work and wages more than employment/unemployment levels. Section 5 draws some conclusions.
© Friedrich Ebert Stiftung | technical support | net edition fes-library | Mai 1999