flexible labour markets
Introduction
The government has tried to facilitate the process of taking-on and dismissing workers. By ensuring that firms do not have to pay high social security payments and national insurance contributions, and are not excessively penalized for dismissing workers during a downturn or recession, the UK has encouraged a flexible labour market.
UK firms pay lower non-wage costs per employee than any other EU country. They are therefore more likely to employ when the need arises. This was shown in the recession of the early 1990’s when unemployment in Britain rose quicker than was anticipated, but also fell quickly from 1993 onwards when the economy started to recover.
The flexibility of the UK labour market is cited as one reason why UK unemployment is now persistently lower than in the European Union and why the UK has been a recipient of such a high level of foreign direct investment.
What is a flexible labour market?
A flexible labour market has several defining characteristics
(a) Flexible employment patterns – both in terms of the flexibility of hours that workers are expected to offer and also the flexibility of skills within the workplace
(b) Ease and cost of hiring and firing workers – reforms to UK employment law now makes it easier to hire and fire workers - this reduces the costs to the employer of making modifications to the size of their employed labour force. Output and employment can more easily be matched.
(c) Switch to shorter-term employment contracts – in many industries, workers are offered jobs on six months, sometimes on month-to-month contracts. There are even some instances of zero hour contracts – where the number of hours that someone is asked to work will vary from week to week – but with no guarantee of any hours being available at all
(d) Greater flexibility in pay arrangements. This can be seen in the expansion of performance related pay (where some part of the total pay (remuneration) package is linked to productivity, company profits or other indicators of performance. In many industries there is some regionalisation of pay awards so that payment can reflect differences in regional demand for and supply of labour
(e) Increased Locational flexibility – many businesses now expect their workers to be able to move within and across different regions as part of their career development – this can be helped by relocation grants
What is driving the demand for a flexible labour market?
• The changing business environment- not least highly competitive "global" product markets, an increasingly rapid pace of technological change and increasing capital intensity of production
• A changing social environment – for example, the increasing female participation ratio and the trend towards early retirement and rising divorce rates
• Government policy environment – a desire to reduce unemployment and make the economy attractive to inward investment as a source of employment and long-term growth
Has the flexible labour market model developed in the UK been beneficial to our growth prospects?
There is no consensus on this answer, some economists believe that the labour market flexibility has led to an increase in wage inequality but other analysts argue that continued low levels of unemployment and inflation are testimony to a better performance. An IMF report published in November 2002 gave a boost to supporters of increased flexibility:
"The U.K. labour markets are more flexible than those of other European economies. This flexibility has significantly contributed to low unemployment and high participation rates. Some of the authorities' active labour market policies, notably the New Deal for the young unemployed, appear to have met with considerable success. However, programs aimed at the unemployed aged 25 and over, as well as at some other groups, have yet to prove their effectiveness and may need to include stronger job-seeking incentives"
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