Employment regulation and the firm: stimulant

or irritant?Mark Beatson

Chief Economist, CIPD

@MarkBeatson1

How does regulation affect employers?

Regulation as a tax on business

Regulation as a dynamic force for change

Bur

den

on b

usin

ess

Dynam

ic force

Employment regulation as a burden on business

• Conventional partial equilibrium analysis treats regulation like tax – one-off or per unit labour employed

• Additional costs:• Keeping up with law, training

etc.• Options foreclosed• Risks of litigation, uncertainty

etc. (Peck et al., (2012))

• Net effect not necessarily negative (possibility of positive spillovers)

• Framework used for Regulatory Impact Assessments

Demand

Supply pre Regulation

Supply post Regulation

Cost

N

Employment regulation as a dynamic force• Regulations a ‘dynamic force for change’ in SMEs

(Kitching, Hart and Wilson (2015))

• Regulations ‘constraining, enabling and motivating’ (Blackburn (2012))

• Regulations a vehicle for knowledge dissemination – both content and as trigger for external advice (Blackburn (2012))

• Regulations as ‘shock to the system’ and source of innovation – common hypothesis for environmental regulation

How does this lead us towards an enriched understanding of impact?• The ‘state of nature’ - Regulation integral to doing

business, not an ‘unnatural’ imposition

• Time – Path dependency

• Information – Including content of regulations, production possibilities

• Decision-making – Human agency, rationality, perceptions, myths, habitus (Allinson et al. (2013))

• Relationships – Trust and reputation (internal and external), embeddedness in networks, political representation

• Interaction with product and labour market strategies

• Heterogeneity of firms – size, age, industry, market conditions etc.

Regulation is not the number one challenge for business

Attracting and retaining customers

Level of tax

Access to finance

Complying with regulation

Staff recruitment/retention

Staff redundancies

Other

None of these

45%

17%

12%

11%

9%

3%

3%

2%

Greatest challenge facing the business, 2014

Source: NAO (2014)

Business perceptions of regulatory burden are falling

2007 2008 2009 2010 2011 2012 2013 20140%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Businesses saying complying with regulation was the greatest chal-

lenge facing them

2007 2008 2009 2010 2011 2012 2013 20140%

10%

20%

30%

40%

50%

60%

70%

Businesses agreeing overall level of regulation in the UK is an obstacle to

growth

Source: NAO (2014)

Obstacles to SME growth

None

Prem

ises

Pensio

ns

Obtai

ning

finan

ce

Shorta

ge o

f skil

ls

Recru

iting

staff

Late

pay

men

t

Cash

flow

Tax e

tc.

Regul

atio

ns

Not a

ble

to ra

ise p

rices

Red ta

pe

Compe

tition

The e

cono

my

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2007/08 2010 2012 2014

Source: SBS Small Business Surveys.

Main obstacles to SME growthASBS 2006/07

ASBS 2007/08

SBS 2010 SBS 2012 SBS 2014

The economy 10 16 33 38 13

Tax, VAT etc. 12 12 8 12 11

Cashflow 10 9 11 10 12

Competition 15 14 10 10 12

Obtaining finance 3 3 8 7 5

Red tape 7

Unable to increase prices 6

Regulation, of which: 14 12 7 8 6

H&S 37 32 35 24 12

Tax-related 15 17 20 17 6

Sector-specific 12 13 16 18 13

Employment 16 17 14 15 10

Environment 11 10 7 7 5

Planning 7 5 7 7 4

Estimated compliance costs for employment regulations are now (relatively) modest

Fire safety

Planning

Consumer protection

Employment

Company law

H&S (national)

Environmental

H&S (local)

Licensing

Food safety

2

2

2.1

2.2

4

6

6.7

9.6

11.6

14.2

Time (mean days) per month spent on compliance

Source: NAO (2014)

Many firms nevertheless see the process of compliance as burdensome

Making contact with appropriate official

Demonstrating compliance

Preparing or reporting figures for Government

Keeping up to date with new Regulations

Finding out which Regulations apply to business

49%

48%

55%

65%

54%

58%

68%

53%

68%

53%

66%

59%

71%

62%

75%

Which aspects of employment regulation were a burden

2012 2014

Source: NAO (2014)

Though there is evidence of stronger (negative) perceptions in the past

• CIPD (2005) - survey found new legislation cited by 36% of employers as most important factor driving practice in their organisation – top reason, exceeding need to improve business performance (25%) and changes to top management team (9%)

• Firms sometimes choose to go beyond statutory requirements – 2005 CIPD survey found that 57% of HR respondents said their organisations met the minimum standard and 41% said they went beyond it.

• To achieve minimum standard:• NMW (initially in some industries)• Working Time (annual leave)• Equal pay when equal pay for equal value claims successful

(principally engineered by trade unions (Conley (2014))• Auto-enrolment (if not already providing an occupational pension

scheme)

What lies behind these employer perceptions?

• Perception is too much legislation, too complicated, too quickly, often gold-plated

• Costs of keeping abreast with law, planning for legislative change, changing policies, training managers, informing staff etc. – in addition to any changes in terms or conditions required

• SMEs typically lack dedicated HR or payroll function, robust management systems etc.

• Business surveys suggest time costs greatest for smallest firms affected (Peck et al. (2012))

• Finite managerial resource in SMEs means effort can be diverted away from value creation to compliance (BERR (2008))

• Only a minority of HR respondents thought compliance with the law reduced disciplinary, grievance or Tribunal cases (CIPD (2005))

Employers are making more use of external advice

1980 1984 1990 1998 2004 2011 1998 2004 20110%

10%

20%

30%

40%

50%

60%

ACAS/Government Management consultantsExternal lawyers External accountants

Workplaces with 25+ employees Workplaces with 10+ employees

Source: WERS survey series.

Disciplinary and grievance procedures are almost universal

1980 1984 1990 1998 2004 2011 1998 2004 20110%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Disciplinary procedure Grievance procedure

Workplaces with 25+ employees Workplaces with 10+ employees

Source: WERS survey series.

More employers have formalised strategies as well as policies(% of workplaces with 5 or more employees)

Formal procedure for dealing with individual grievances

Formal procedure for dealing with individual discipline/dismissal

Procedures for handling collective disputes

Formal written policies on equal opportunities

Formal strategy on employee development

Formal strategy on employee job satisfaction

Formal strategy on employee diversity

Formal strategy on staffing requirements

83

86

41

67

54

37

29

42

88

89

35

76

55

38

32

47

2011 2004

Source: Workplace Employment Relations Study, 2004 and 2011.

Is employment legislation a barrier to improved management practices?

UK USA France Germany

8% 8%15%

25%

27% 26%

38%

47%

Major constraint Minor constraint

Source: Bloom et al. (2011)

Has legislation changed the way people are managed?• Little evidence of fundamental changes in management practice

• NMW did not generally lead to significant productivity-enhancing changes in management practices in low-paying sectors (Metcalf (2007))

• Working Time Regulations triggered some operational changes – average working hours of senior doctors reduced by 8 hours per week (Dolton, Kidd and Fooken (2014)) - but in other organisations, widespread opt-outs meant little change to working practices (BIS (2014)).

• With age discrimination, many employers had removed illegal provisions and practices, but had not taken the opportunity to challenge stereotypes and employment practices more fundamentally (Metcalf and Meadows (2010)) cf ‘empty shell’ hypothesis (Hoque and Noon (2004))

• Regulations had little impact – a ‘background influence’ – on collective employment relations (Hall et al. (2010)). Statutory recognition procedure may have prevented aggressive anti-unionism and encouraged pragmatic, pre-emptive approach to unions.

• But for more specialised aspects (TUPE and collective redundancies), legislation did sometimes give employers a template

• Legislation may have given some legs to the ‘Regulator’ personnel role (Caldwell (2003)). Increased formalisation of policies and procedures may inhibit managers from adopting more flexible approaches to issues? (Jones and Saundry (2012)).

Impact on SMEs?

• Impact of legislation and reaction to it will vary according to type of SME (e.g. start up versus lifestyle versus growth SME) (Blackburn (2012))

• For many micro firms ‘strategic stickiness’ means change kept to minimum. For small firms, legislation supported – but did not on its own prompt - an intended direction of travel towards higher value market segments (Edwards, Ram and Black (2003))

• Legislation may have sharpened and moved boundaries between legal and illicit sectors? (Dickens, Hall and Wood (2005))

• Non-compliance with NMW generally due to lack of knowledge of Regulations and how to apply them, or weaknesses in administrative capabilities, rather than deliberate non-compliance (BIS (2011))

• Many SMEs with informal, ‘family’ culture lack written and effective procedures and are at greater risk of Tribunal claims (and losing them) (Saridakis et al. (2008)). However, employees in these firms sometimes accept employer discretion rather than external regulatory requirements (Atkinson, Mallett and Wapshott (2014))

• May limit the capability to innovate in some SMEs? (Hewitt-Dundas (2006))

What if things were different?• Is employment legislation holding back job creation?

Would less employment protection (a la Beechcroft) generate more job opportunities (Haldenby at al. (2011))?

• How much more job creation do we need?

• Could more employment regulation be a modernisation tool to get UK organisations out of the productivity doldrums?

• Track record even in areas of substantive change (e.g. NMW, WTR) is that few employers choose to embrace (or can embrace) far-reaching change – path dependency is strong

• Employers are fearful of forced change (e.g. expected consequences if the UK lost the opt-out provisions to the 48 hour week)

Conclusions• Business perceptions of costs and burdens were strong in the

post-1997 period but have moderated since 2009/2010 – either the irritant itches less, the government has applied a soothing balm or the recession imposed a new sense of proportion!

• Little aggregate evidence of transformational change but legislation has generally been a carefully crafted compromise between opposing positions – designed not to be too disruptive or costly – and it has tended to go with the grain of prevailing people management practices.

• Too much too quickly early in the post-1997 period may have diverted management attention away from other priorities.

• Businesses remain nervous about the future and possibility of imposed change.

• Little evidence of the impact on business of recent changes in awareness and enforcement.

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Atkinson, C, Wapshott, R and Mallett, O (2014) ‘”You try to be a fair employer”: Regulation and employment relationships in medium-sized firms’, International Small Business Journal,

BERR (2008) Impact of regulation on productivity. BERR Occasional Paper No. 3.

Blackburn, R (2012) Segmenting the SME market and implications for service provision: a literature review. ACAS Research Paper 09/12.

Bloom, N, Lemos, R, Qi, M, Sadun, R and Van Reenen, J (2011) Constraints on developing UK management practices. BIS Research Paper No. 58.

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