Employment Protection Legislation and the Growth Crisis

Abstract

In his recent book Zombie Economics, John Quiggin (2010) reviewed a number of economic theories and assumptions that have refused to die despite strong evidence that they are highly flawed. These include the claim that spending by the state crowds out private investment, the belief that efficient (i.e. weakly regulated) financial markets provide an accurate guide to the value of economic assets, and that policies that favour the well-off will, in the long-run, produce trickle down effects that benefit everyone. The belief that employment protection legislation (EPL) necessarily causes unemployment and is bad for competitiveness might be added to this list, and it is a belief that is at the heart of the Conservative-Liberal Democrat coalition government’s strategy for jobs growth and enhancing the competitiveness of the UK economy. Since coming to power in May 2010, the government has unleashed a series of reforms that have eroded constraints on employers’ ability to dismiss their employees and made it harder for dismissed workers to pursue compensation. The government has claimed that its reform programme will lighten the regulatory burden for employers and thereby encourage them to hire a greater number of employees. The main aim of this chapter is to subject this claim to critical scrutiny.