The Regulation of the Labour Market in the UK - Term Paper Example

 The Regulation of the Labour Market Introduction The UK takes pride in being one of the few operational welfare states in the world as it spends about twenty percent of its GDP on keeping itself a welfare state. Of course a truly welfare based state would provide each and every necessity of life for all the people living in it but modern welfare states as they operate in the western civilisation can provide only ‘welfare’ services. These welfare services create some privileges and rights for their citizens that include things such as unemployment benefits, health provisions, education support and other social services (Adams, 2002). Of these unemployment is one of the major political issues for a government and the government may try to maintain low unemployment through the regulation of the labour market (Sloman, 2004). However, the government is not always successful in regulating the labour market nor is it always helpful towards maintaining low unemployment levels. It can be shown with relative evidence that heavy regulation of labour can lead to unemployment and things such as maintaining a high minimum wage may actually lead to an increase in unemployment or inflationary pressures on the economy (Sloman, 2004). In fact, if a government wishes to maintain a minimum wage, it also has to look at several other factors for ensuring high employment in a given economic system. Regulation Of course the first question which needs to be asked is why a government would regulate labour at all? Considering what economists have been discussing for years regarding the ideas of a free market and competition, labour regulation and minimum wages appear to go against the ideals held dear by capitalist thinkers. There are several answers which can be given to this question and they all deal with protecting the people from those who would seek to exploit labour. For example, without proper regulation the labour market could be imperfect as paymasters could be unfair to their labour force (Botero et. al., 2004). Richardson (1999) notes that the “regulation of the labour market has been a feature of Western economies since it was proposed as an amelioration of some of the worst abuses of workers experienced during the Industrial Revolution (Richardson,1999, Pg. 1)”. Undoubtedly, the situation during the times of the Industrial Revolution meant that factory owners and mill owners could treat their workers as they wished since there was no regulatory control on what a worker should be paid or how many hours a worker should work reasonably before calling it a day. The situation might not be too different today as it was during the Industrial Revolution since without some form of regulation, employers could discriminate against minorities or disadvantaged groups by paying women much less than men. They could also summarily remove employees as they wanted to do thus placing unemployment pressures on a welfare state. Threaten to hold salaries if workers don’t work longer hours and even fail to provide basic amenities to their employees. Thus regulation seeks to protect those who may not be able to protect themselves. In the case of minimum wage, the government determines the absolute minimum which should be paid given the economic conditions for an individual to have a reasonable standard of living as per the work done by him or her (Botero et. al., 2004). Moreover, while the person who loses his/her job would feel most of the burden of unemployment, society at large is also affected negatively if a large portion of the productive workforce and labour pool is left without work. In economic terms, this simply means that economy is underutilizing its capacity to produce but it can also point towards other more significant problems. To prevent this from happening, many states intervene on behalf of their citizens and protect them from being jobless while ensuring a minimum wage level. Why Regulation Could Lead to Inefficiencies Of course the part played by labour in the development of an economy cannot be denied by any rational thinker and the Model of Surplus Labour is a theory where the presence of unemployment or underemployment becomes very dangerous for the development of a country. The theory suggests that economic development in a system will only take place at a rapid pace when labour is shifted from the traditional sectors to modern areas which will have a beneficial effect on the economy as labour prices will slowly rise and then level off for all sectors (Robinson, 2005). In this model, keeping a minimum wage would lead to inefficiencies as the movement of labour from one segment of the economy e.g. agriculture to another e.g. services could be restricted since the government has already mandated a minimum wage for all workers. Additionally, we can examine the Harris-Todaro model which looks at economic development in socially relevant terms i.e., the migration of labour from urban to rural centres of population. While this approach takes its cues from sociologists, the applicability of such a model seems to be more real for developing countries such as China and India rather than the countries which have seen stable economic growth for sustained periods of time. As a practical example, the progress made by China as it developed both rural areas and established industries in rural areas to handle unemployment issues is a good example of economic development where labour is provided opportunities in all sectors while the regulation level on employment is decreased (Adams, 2002). Contrary to the expectations given by people who may suggest that deregulation would lead to unfair practices, the situation for workers in China has actually improved as more competition for the same level of labour is created. A two decade long differential study for the economy of china shows that between 1981 and 2001, the percentage of working people getting by on less than one American dollar per day, decreased from eighty percent to less than thirty percent (Bardhan, 2006). Even though China does not have the strict labour regulation laws that the UK has, they still managed to bring about an improvement to the living standards of their citizens. Regulation and Unemployment As noted by Botero et. al. (2004) regarding minimum wages and labour regulations, “Heavier regulation of labour is associated with lower labour force participation and higher unemployment, especially of the young (Botero et. al., 2004, pg. 1)”. The researchers examined data from eighty-five different countries including all countries in the EU and give several reasons for their assessment regarding regulation. The primary reason given by them is that regulation causes inefficiencies to come into play while economic theories support the idea of creating efficiencies. Of course politics and the government’s approach to the regulation of the labour market affects the level of unemployment. As reported by Botero et. al. (2004), “There is some support for the view that countries with a longer history of leftist governments have more extensive regulation of labour, consistent with the political theory (Botero et. al., 2004, Pg. 26)”. Thus instead of focusing on what is good for the economy and what is good for the country in the long run, politicians may be more focused on numbers which change year to year and quarter to quarter rather than economic difficulties that may be created decades from today. A government which maintains a good level for the minimum wage may be seen as a positive influence by socialist groups and labour unions but it must be noted that the same minimum wage becomes a contributing factor to inflation. Additionally, with welfare rates for unemployment close to the minimum wage, the incentive to work for many young people may be drastically reduced since they may not have family pressures or children to look after in case they do become unemployed (Botero et. al., 2004). For politicians, the unemployment which they might seek to control with regulation and minimum wage laws may actually be increased with unemployment benefits and a lack of motivation for people to seek opportunities in other sectors of the economy. However, it is not easy to blame politicians for trying to regulate the labour market (Guttman, 1996). The consequences of having a section of the population as unemployed can be far greater and more severe for the society than a higher than normal level of inflation (Jahoda, 1979). While a lot of research and literature has been created to cover that aspect of social existence, the regulation of the labour market and minimum wage standards remains a largely economic concern. This is because unemployment is an economic measure for a society and the resulting social impact often remains a secondary concern. For example, In the 1970s, employment levels were often low due to political situations and the economic crisis which was preventing the UK from experiencing the boom that it could have. However, the larger picture included too many factors other than the minimum wage for it to be solely accused of causing a rise in unemployment (Jahoda, 1979). In fact, for some economists, regulatory control and minimum wage laws are actually beneficial for the economy in terms of productivity even if they contribute towards an increased level of unemployment. Storm (2007) begins the debate on the topic by saying that: “The impact of labour market regulation on labour productivity growth is ambiguous: on the one hand, regulation raises labour adjustment costs, which negatively affects productivity; but on the other hand, regulation may (for various reasons) raise worker motivation and commitment and (by means of wage bargaining co-ordination) stimulate labour-saving technological progress, thus raising productivity (Storm, 2007, Pg. 4)”. However, he quickly aligns himself with the regulators after presenting evidence from twenty countries that point to the fact that regulated and coordinated labour markets enhance productivity for all sectors of the economy and lead to increased levels of growth and development (Storm, 2007). This certainly places him at odds with Botero et. al. (2004) but it must be noted that Strom (2007) is taking a look at the increase in productivity which comes when workers have long term employment security through regulation and income security coming from minimum wage laws and unemployment benefits. Storm (2007) categorises countries into three groups of which the countries with highly coordinated and regulated labour relation systems have higher productivity rates. This in turn means that employees in such countries where regulation is strong will have real growth in terms of wages. Additionally, as employees become more secure in their position and have a security blanket in terms of unemployment protection and minimum wages, they might be more likely to take risks and switch jobs when offered positions in other industries. Of course the most important benefit gained by regulation is the increase in productivity which indicates a connection between the governmental approach to labour relations and Theory X and Theory Y of management (Torrington and Hall, 2002). With regulation, theory Y seems to be at play since workers might be happier in their jobs and become more productive with the tools that they are given. Without regulation, Theory X could be at play which leads to workers performing poorly in services related industries. While this approach might be a useful method for examining the need for minimum wages, it remains up to future economists and researchers to understand the full impact of the relationship between unemployment and minimum wage regulations. Works Cited Adams, R. 2002, Social Policy for Social Work, Palgrave. Bardhan, P. 2006, ‘Does Globalization Help or Hurt the World's Poor?’, Scientific American, vol. 294 no. 4, pp84-91. Botero, J. et. al. 2004, ‘The Regulation of Labour’, [Online] Available at: www.doingbusiness.org/documents/labor_June04.pdf Guttman, R. 1996, ‘Letter from Dublin’, Europe, vol. 359, no. 9, pp 36-37. Jahoda, M. 1979, ‘The Impact of Unemployment in the 1930s and 1970s’, Bulletin of the British Psychological Society, vol. 32, no. 1, pp. 309-314. Richardson, S. 1999, Reshaping the Labour Market, Cambridge University Press. Robinson, W. 2005, ‘Global Capitalism: The New Transnationalism and the Folly of Conventional Thinking.’ Science & Society, vol. 69, no. 3, pp. 316-328. Sloman, J. 2004, The Economic Environment of Business, Prentice Hall. Storm, S. 2007, ‘Why labour market regulation may pay off: Worker motivation, co-ordination and productivity growth’, [Online] Available at: www.ilo.org/public/english/employment/download/elm/elm07-4.pdf Torrington, D. and Hall, L. 2002, Human Resources Management, Prenetice Hall. Word Count: 2,053 Read More