Sum of employment reforms risks stifling labour market

Good morning.

Unintended consequences

The government’s far-reaching changes to the UK labour market have returned from their consultation period. The result is as radical as the plans were to begin with.

In some ways, they are downstream of its promises on tax and spend. Given the Labour government essentially ruled out using public spending as a lever to improve social outcomes, it was always likely to turn to regulation as an alternative approach.

In that way this government owes a strange debt to George Osborne. As chancellor, he cut in-work benefits and increased the national minimum wage to compensate. Similarly, this government is not increasing public spending but is increasing the amount it asks of businesses (not least by increasing the minimum wage).

When you sum together the looming increase in employers’ national insurance contributions, the increase in the minimum wage and the swath of new obligations, the government really is increasing the cost of employing someone in quite a significant way. I don’t think any of the things the government is proposing are on their own beyond the pale. But when you add them together, they may have consequences the government dislikes.

Readers who read my last newsletter at the New Statesman will remember I had similar concerns about Osborne’s plans. I thought that cutting in-work benefits would increase poverty (it did, but not by as much as I feared) and that the rise in the minimum wage would cause unemployment (it didn’t). So it may be that these reforms work similarly.

In addition, the government wants some jobs in the private sector to vanish. It wants to reduce the number of immigrants coming to the UK, which means doing different things with the existing labour force. Disincentivising hiring in one part of the economy to move consumption expenditure to increased defence and infrastructure spending is a feature, not a bug.

But my concern is that, by doing all of this via regulation and none via tax, the government is betting heavily that these changes will have the outcomes it wants, while doing little to positively direct things. It may be that the UK simply ends up with a less dynamic labour market and not much else when all is said and done.

Now try this

I saw The Summer With Carmen, a film that is another draft away from being a top-class comedy. I would give it a miss, quite frankly. Jonathan Romney’s review is here.

What I wouldn’t give a miss to, if you are a student at sixth form or university, is the in-person conversation we are hosting on May 1. Sarah Ebner, our head of newsletters, will be talking to me about politics and how I got into journalism. Plus, we’ll have plenty of time for your questions. Sign up here.

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