Do Labour’s employment reforms risk killing the goose that lays the golden egg?
By almost any measure the UK jobs market has been one of the economic success stories of the last quarter of a century. The unemployment rate has averaged 5.5% since the turn of the century. This compares to a rate of 6.4% in the preceding forty years. The current unemployment rate stands at just 4.0%. Even the much fretted about inactivity rate - the proportion of working age Britons not in work, nor seeking work - at 21.8% is well below its fifty-year average of 23.1%. Whatever metrics the Chancellor may lean on at the upcoming Budget to buttress her claim to the worst economic inheritance since World War Two, these labour market data won’t be amongst them. The reality is that as a jobs-creating engine the UK economy has done a remarkable task under the stewardship of both Labour and Conservative governments.
This resilience of the jobs market may also explain why the current government is feeling emboldened to layer on an enhanced tax and regulatory burden. Employers may be being seen as some of those that the Prime Minister, Keir Stamer, has described as having the “broadest shoulders”. The risk is that a new government in a rush to instigate reform and plug tax gaps may overload employers just at the very moment a seismic change – Generative Alternative Intelligence – is poised to create huge disruption to the jobs market. Throttling the goose that has been one of the few to lay golden eggs in recent times would not be a great start for the Labour Party.
First, it is important to acknowledge the motivations for reform of the UK labour market have good intentions and can be individually justified. What I increasingly hear from private sector employers is not the specifics of each well-meaning reform, but the cumulative impact of all of them together. So what are these changes?
The first of these changes is the National Living Wage. Since 2016 the National Living Wage has gone from £7.20/ per hour to what is estimated to be £12.10/per hour from next April. This is a move from the statutory minimum being 55% of median earnings in 2016, to now 66% of median earnings. From next April the lower rate of the National Living Wage for those aged 18-20 years old - currently £8.60 per hour - will also start to converge with this higher rate. This is a big shift in low pay and the national rate makes it more of a challenge for employers in low pay regions such as the North East of England and East Midlands, than it is in London and the South East.
Secondly, the government’s Employment Rights Bill - introduced to Parliament earlier this month - has twenty-eight individual measures designed to end unfair employment practices. These include bringing to an end zero-hours contracts, broadening eligibility to statutory sick pay, and enhancing Day One rights. This is being marketed as a pro-growth, pro-productivity package. Employers groups are more cautious on how these changes will alter what is always a balance of responsibilities between the employee and the employer.
The third big change has been a tightening of skilled visa eligibility. In early 2024 the then Home Secretary, James Cleverly, introduced several tighter salary and dependent restrictions for obtaining skilled and sponsored study visas. In Q3 2024 the number of applications was down 38% from last year. This is a big shift in the ability of employers to obtain the skills they need, when they need them.
Fourth is next week’s Budget. This is now widely expected to announce an increase in Employer National Insurance as the Chancellor seeks to plug a gap in the public finances. A one penny increase is estimated to raise £9billion/year from employers. Whilst most research suggests this eventually gets passed on in the form of lower pay increases, and higher selling prices – some employers will find this hard to pass on this tax given the pressures to prices and worker retention in recent years.
And standing on the horizon is the vision the government has to increase pension contributions so that future pensioners are saving sufficient amounts for their retirement. Whilst the ongoing Pensions Review chaired by Emma Reynolds MP is yet to set out the argument for higher contributions, it seems inevitable that employers will be asked to make a significant contribution to higher accrual rates.
So stepping back, each of these five reforms are well-intentioned to deal with in-work poverty, secure employment, public trust in the migration system, funding of public services and dignity in retirement. These reforms will also feed into a UK labour market that is still ranked fourth out of almost fifty EU and OECD countries for its labour market flexibility. However, the concern must be that it creates policy indigestion. This is a lot for employers to absorb at the same time as higher energy costs, volatile consumer demand, and business rates have presented huge challenges.
It is understandable that political advisers are advising a rapid pace of change in the face of increasingly short political honeymoons. But advisers at the Department for Work and Pensions and at the Treasury need to be asking whether excessive layering of reform – without time to evaluate the cumulative impact - risks a hard stop in employee demand. Vacancies are already down by almost half a million from their post-pandemic peak and a soft landing is not assured. The good news for the Work and Pensions Secretary, Liz Kendall, is she has some excellent expertise on her new Labour Market Advisory Board to help her answer these questions – albeit there is a notable lack of private sector employers represented. The best-intentioned jobs market reforms will fall flat if demand for workers ebbs away. Enhanced employment rights are only helpful for the employed.
At a time when private sector employers are rapidly adapting their processes and resourcing to adapt to generate AI, the supply of jobs of the recent past across huge employment sectors like professional services, retail and the creative industries cannot be assured. Layering reform and tax on one of the UK’s most successful sectors comes with considerable risk.
