Daniel Hannan is Director-General of the Institute of Economic Affairs
The United Kingdom has reached the end of a long run of structurally high employment. For more than 30 years, our jobs market was the envy of Europe. Yes, we could be hit by external events, notably the global financial crisis. But we bounced back quickly, because we understood that the best way to encourage employers to hire people was to make it easy to fire them.
A moment’s thought reveals why. In a country with light employment regulations, firms take on staff during upswings, knowing that they can always drop them if things go wrong. But in a country with restrictive regulations, every employee is a potential liability, and companies hang back warily. In such countries, unemployment is structurally high, especially among young people. That has been southern Europe’s tragedy for decades.
British governments used to understand this. Neither Tony Blair nor Gordon Brown tried to undo the labour reforms of the 1980s. Both knew that, if they wanted revenue for public services, they needed a buoyant economy.
Our present leaders, by contrast, don’t seem much interested in cause and effect. Never mind their tax-and-spend policies. They appear not to grasp that raising the costs of employing people leads to fewer people being employed.
Last year, businesses were hit with a double tax. Employer National Insurance contributions rose from 13.8 per cent to 15 per cent, and at the same time kicked in on earnings above £5,000 instead of £9,100.
What did MPs think would happen, for heaven’s sake? If tobacco taxes reduce smoking and carbon taxes reduce emissions, what did they suppose jobs taxes would do? Sure enough, the number of employees on payroll plunged by 109,000 the following month, and has declined steadily since.
The really striking figure, though, is youth unemployment. Among 16- to 24-year-olds, joblessness has hit a positively Mediterranean rate of 16 per cent. Why? Again, because of our refusal to acknowledge that actions have consequences.
Pushing up the minimum wage (which applies from age 16) and the national living wage (which applies from 21) makes MPs feel righteous. They have voted to raise minimum remuneration for 20-year-olds by 55 per cent since 2020. The trouble is that these repeated hikes end up punishing rather than helping young people, because they close off job opportunities and push some onto welfare. Around 60,000 students a year go straight from university onto long-term sickness benefits.
MPs with a basic knowledge of economics tend to keep quiet, because they are terrified of being asked how they would like to live on £12.50 an hour. It is an irrelevant question, but it turns politicians to jelly.
I was, I think, the only parliamentarian to speak out against the above-inflation hike in the minimum wage decreed by the Tories during the pandemic, when wages were falling across the private sector. Everyone else wanted an even bigger rise. Ignorant voters, self-righteous journalists and cowardly politicians make a potent combination.
Last year, the minimum wage rose by 18 per cent for 16- and 17-year-olds and by 16.3 per cent for 18-, 19- and 20-year olds. Result? Fewer jobs for young people. Openings in the hospitality sector fell by 22,000. Graduate postings down by an almost unbelievable 49 per cent on last year.
To repeat, policies have consequences. I sometimes think that the readiness to acknowledge trade-offs is the real dividing-line in politics. And I don’t just mean among politicians. Among voters, too, there are those who look at the costs of policies, and those who go to the polling station humming “I’m just a soul whose intentions are good”.
Hikes in the minimum wage are the least of it. The open-ended extension of equalities laws is an even greater deterrent. When retail workers can be compensated for being paid less than warehouse workers, supposedly on sex discrimination grounds, even though the retail workers were refusing to be redeployed to warehouses, employers can hardly be blamed for being reluctant to hire.
And that is before we get to the full implementation of Angela Rayner’s package of employment laws, the most far-reaching since the mid-1970s.
We can see where this is going: more and more workers’ rights, fewer and fewer workers. We are in a vicious circle. Higher unemployment means fewer people paying taxes into the system and more drawing benefits from it. Since MPs have already shown that they cannot cut spending – not even mildly to slow the rise in benefits claims – that can only mean even higher taxes, prompting more disinvestment, slower growth, higher unemployment and lower revenue.
According to a survey by the British Council, 72 per cent of Brits under 30 are thinking of working abroad, and who can blame them? We are pulling off the extraordinary double of simultaneous emigration and immigration crises, exporting our entrepreneurs and replacing them with people who go onto benefits. And, other than a few loyal IEA supporters, no one seems especially bothered. Truly, we free-marketeers have our work cut out.
Absolutely correct - I wrote a report for Michael Forsythe in 1991-2 which helped lead to the ending of the Wages Councils system in 1993, so we did not have minimum wages until Labour was elected in 1998 - Stan Siebert
Excellent article pointing out the trade offs and reminding us all that the road to hell can be paved with superficially good intentions.