IES Viewpoint: Employment Law and the evidence base

Newsletter articles

1 Sep 2012

Employment Studies Issue 16

Nigel Meager, Director

Recent issues of Employment Studies have focused on how evidence-based policy-making is coming under pressure in the current political and economic climate. In the last issue we noted the increasingly cavalier regard for the existing evidence in the discussion of UK migration policy.

Since then, a more egregious example has featured in the policy debate, albeit one which subsequently foundered on the rocks of internal coalition disagreement. I refer to the Beecroft report on employment law commissioned by the Department for Business, Innovation and Skills (BIS), and the associated proposals to increase the qualifying threshold for unfair dismissal from one year to two. From the perspective of evidence-based policymaking, the concern is not simply the content of the proposals (of which more shortly) but the form in which they are presented. The Beecroft report, covering a wide range of major employment regulations, including unfair dismissal, collective redundancies, small firms' exemptions, work permits, and equal pay, is 16 pages long. These pages consist mainly of views and assertions with no reference to any evidence on which they might be based, despite the existence of a significant body of high quality research on all the topics covered by the report. Some press criticism focused on the whether the report's author (Adrian Beecroft) was appropriately qualified for the role (he is a venture capitalist with a degree in physics). Arguably this would be less important if, as has previously been the norm for such government reports, his work was supported by a secretariat, reviewing existing research and taking evidence from experts. A good example of this was the 2007 Freud report on Welfare-to-Work. Equally controversial, and with an author (David Freud, now a Conservative minister) drawn from the investment banking community rather than the employment policy world, this report was at least heavily rooted in the existing research and data, and the proposals significantly more soundly based as a result.

The contrast between Freud and Beecroft is instructive, and raises a question about how far it signals a move away from evidencebased policy-making in the current parliament. It's too early to say, but it's worth noting that the Beecroft report is not an isolated example. The model of choosing a prominent business person to present their personal views on a policy issue, and issuing those views as an 'independent' government report, with little or no underlying evidence behind them, is not uncommon. Examples of this 'evidencelight' approach include: the thoughts on how government should go about its procurement activities, by retailing tycoon, Sir Philip Green, in a report of 33 Powerpoint-style pages for the Cabinet Office in late 2010, widely lampooned in the press and policy circles; and the more recent views of Lord Young on business start-up support for BIS.

Of course, it could be argued that what matters is whether the recommendations of these reports can be justified by evidence, even if the reports themselves are not diligent in citing that evidence. So returning to the employment policy arena, do the Beecroft proposals in fact stand up to the evidence? As several expert labour economists (including John Van Reenen at the LSE and Jonathan Portes from NIESR) have pointed out, they really don't.

The underlying premise of the Beecroft report is set out in its claim "Many regulations, conceived in an era of full employment, are designed to make employment more attractive to potential employees… in today's era of a lack of jobs, those regulations simply exacerbate the national problem of high unemployment". In fact, as shown by numerous cross-country studies, using the data compiled by the OECD on the strength of employment regulation, the UK benefits from one of the most liberal employment protection regimes in the Western World (the latest data show that only in the USA and Canada is it easier for employers to hire and fire than in the UK). Additionally, such research shows that any effect of employment regulation on overall job creation is weak or ambiguous: at any point of time it is easy to find examples of countries with a heavy regulatory burden that perform well in job creation terms, and countries with light regulation that perform poorly (and vice versa) As the OECD puts it "There appears to be little or no association between employment protection legislation strictness and overall unemployment". A good simple summary of the relevant evidence is in John Van Reenan's recent blog.

Similarly, if we look at trends over time, there is no evidence that changes in employment protection have been associated with changes in the rate of job creation. Thus take, for example, the proposed change in the threshold for unfair dismissal. Since unfair dismissal legislation was first introduced in the 1970s, the threshold has been changed several times: it began at six months, was increased to a year, then to two years, before being reduced again to a year. There is no evidence that any of these previous changes have improved (or impaired) the rate of job creation, and it is unlikely that a further increase in the threshold to two years will have such an effect. It is hard to imagine circumstances in which any competent employer will not have been able to assess an employee's suitability and performance within a year of hiring him or her, and to have taken appropriate steps in cases where the match is not good. Indeed, in this specific case it is possible that the change will have unintended consequences and that employees who believe they have been unfairly dismissed before the two-year threshold and no longer able to claim unfair dismissal may seek alternative sources of redress, through the discrimination jurisdictions which apply from the first day of employment (and which the government cannot alter because they are enshrined in European law). There is evidence that this already happens in cases of unfair dismissal before the one-year threshold.

As Van Reenan points out, what the evidence does show is that reforms relating to benefits, training and skills, and welfare-to-work programmes are far more important in affecting labour market performance than tweaks to employment protection legislation. This is where the evidence-based policy action should be targeted, rather than the proposals in the Beecroft report.

To conclude, we should also note that the tendency in government is not all in one direction, and there are also some welcome recent initiatives to strengthen the evidence base of policy (e.g. a proposal from the Cabinet Office for the greater use of experimental methods in social and economic policy). It is to be hoped that moves in the latter direction gain the upper hand.