2. The UK experience of labour market-regulation 1979-1996

The changes in the UK framework of regulation to be discussed below were summarised in the introduction: social security, minimum wages, employment protection and trade union presence and power. The UK does not have a history of such thorough labour market regulation as many other European countries. In particular, the UK system of trade union pay-setting had been progressively decentralised before 1979. It was largely company or plant-based, with a system of legal immunities rather than legislated rights. Thus the changes that have taken place since 1979 have been so extensive as to leave little doubt that the UK has undergone an experiment with deregulation almost unparalleled among developed countries (New Zealand being a possible exception).

- Social Security: There have been numerous changes to the UK benefit system since 1979. However, here we wish to focus on those changes relevant to the replacement ratio used in most analyses of unemployment. This reflects the scale and eligibility for benefits. We also include here a discussion of other aspects of the social wage not often considered, such as subsidised housing, etc. The most attention-getting reforms are:

* Unemployment insurance was payable for up to one year at a fixed rate (non-income-related) and based on a contribution whilst in work. This has been reduced to 6 months and the real value of this benefit has declined by 5%.

* An earnings-related supplement payable for 9 months subject to a more restrictive contributions record was abolished in 1982.

* A means-tested Supplementary Benefit set at levels assessed on family needs and offset by other benefits has been frozen in real terms. Eligibility requires some groups to actively seek work. This has been enforced more strictly since 1986.

The net result of these changes is that the replacement ratio has fallen sharply with respect to average earnings. Many more people, especially those with a working partner, are ineligible for benefits, and job search commitments for the unemployed have been strengthened. However, a number of other changes have gone in another direction. Local subsidies for Council housing have been progressively removed with rents doubling in real terms since 1979. A number of subsidies relating to health care, dentistry, school meals, etc, (e.g. medicinal drug prescription charges) have been reduced (except some hidden benefits which increase the benefit replacement ratio). Further compensation for benefit recipients as a result of tax changes (such as a value-added-tax on fuel/heating and other local taxation) has reduced the gap between in- and out-of-work incomes. Hence replacement ratios have unequivocally fallen for those on close-to-average earnings, while the situation for those with low earnings (which have grown more modestly) or who are trying to find low paying work while out of work is less clear.

- Minimum Wages: The UK had a system of industry minima set by the Wages Councils. However, these Councils protected only about 2.5 million workers in 1992 (compared to 3 million 15 years ago) since not all industries were covered. Originally set up after the First World War to cover low-paying industries which had limited potential for unionisation, changing patterns of employment kept many low-paying service industries from beeing covered. Through the 1980s minimum rates were increased by less than average earnings. A comparison of these minima with average wages in the covered sectors shows a slide from around 80% to nearly 60% of the average by the time of abolition. Further weakening occurred with the move toward a single industry minimum in 1986 which replaced a complex myriad of occupational and skill-specific rates. Youths were exempted from these minima in 1986 and, finally, in 1993 the Wages Councils were abolished altogether.

In many non-Wages Council industries, union bargains over minimum rates have been followed by non-union firms, although these were not enforceable legally. However, the progressive decline of industry-level bargaining since the 1950s continued apace through the 1980s. Union-bargained minima hence all but disappeared from firms without recognised unions. Thus, as the 1980s progressed, the UK became one of the few countries without either legally-backed minimum wages or a series of expansive union-employer agreed minima.

- Employment Protection: This is a less well-defined area of legislation ranging from equal rights legislation to redundancy law and maternity pay. A key change in the UK is that the period of qualification for statutory redundancy and employment rights have been extended from 6 months to two years. Part-time workers' qualification periods were raised to 5 years but this has been successfully challenged in the European Court. Regulation of working hours, by limitations on shopping on Sunday and constraints on hours worked by women dating back to the First World War, were also reformed.

There are few legal constraints on the use of part-time, temporary-contract and self-employed forms of employment. Indeed there are often financial incentives in the employer and employee tax systems to adopt these types of employment. Further the UK has opted out of European social legislation often referred to as the Social Chapter. Thus the UK system is as important for its lack of legislative interference as it is for changes made to the system that was in place pre-Thatcher. The unregulated nature of the employment relationship is summarized by the OECD Index for Labour Standards, a synthetic index of constraints placed on employers, including minimum wages. The UK scores a zero, along with the US. The next lowest score is a 2 for both Denmark and Canada. This table is a reprint of OECD Employment outlook 1994, Table 4.8. (placing the UK on par with the US is somewhat unjustified, since the US has a national minimum wage often accompanied by state-based supplement).

- Union Presence and Strength: Union membership in the UK peaked in 1979 at 13.3 million workers, or nearly 53% of the active labour force. By 1990 this had declined to under 10 million with a density of 40%. The decline has not slowed since 1995 estimates indicate that union membership has fallen to 8.7 million or just under 37% of the labour force. This understates the decline in the private sector, since public sector membership density has remained steady. Only around a quarter of private sector employment is now unionised. However, membership alone may not be the best guide to the influence of unions. Nevertheless, the decline in coverage of workers by recognised trade unions from 66% in 1984 to 53% in 1990 also suggests declining union presence. Recent moves toward decentralised bargaining mean that few plants without a recognised union follow an industry or company-wide bargain. Estimates of the coverage of union wage bargaining produced by Brown (1993) suggest that 1990 coverage levels were substantially below those of the 1960s and may well be the lowest in post-war British history. In addition to declining influence in the workplace, unions have progressively been isolated from contact with government.

The conclusion is inescapable that among developed economies the UK is the least regulated especially in regards the protection it offers vulnerable groups of workers. However, this judgement requires subjective assessment of the relative importance of minimum wages versus union collective bargaining particularly when making comparisons with the US or New Zealand. In addition, the changes in the UK over the last 15 years or so have tended to weaken all aspects of regulation and social protection. The UK thus provides an extended experiment with deregulation and its consequences. Thus we may wish to examine evidence of change in overall macroeconomic results referring to unemployment and intermediate measures of flexibility. Such evidence includes the flexibility of wages with respect to unemployment at the aggregate level and between groups (wage inequality), the evolving pattern of unemployment, joblessness, and labour turnover.

© Friedrich Ebert Stiftung | technical support | net edition fes-library | Mai 1999

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