Magazine article Management Today

A Flexible Labour Force That Will Strain the Public Purse: If Employment Costs Shift to the Public Sector, High Taxes Will Be Here to Stay

Magazine article Management Today

A Flexible Labour Force That Will Strain the Public Purse: If Employment Costs Shift to the Public Sector, High Taxes Will Be Here to Stay

Article excerpt

A flexible labour force has been an ambition of government economic policy for so long that it surely must be a good thing. Normally, I would not disagree. Flexibility brings with it an ability on the part of companies to respond swiftly to changes in demand. It enables new production techniques to be introduced with the minimum of fuss. It allows companies to move more easily between locations. Above all, it implies an end to the stultifying pettiness that often characterised UK labour relations in the past.

All these are benefits that British managers are now enjoying. They partly reflect the labour-market reforms of the Thatcher era, and the fact that, in several set-piece contests, the unions came off worse. But they are also due to the change in the nature of work, and the decline in the relative importance in the economy of large industrial plants, where the power of organised labour was at its strongest.

Flexibility also has a downside, however, and it is one that a government struggling to eradicate a huge budget deficit could do without. A flexible labour force, it appears, is one in which a significantly larger part of the burden of maintaining the income of the workforce falls upon the public purse

The first hint of this was in the recent recession. The downward lurch into recession began in the middle of 1990 and, on the basis of past behaviour, unemployment could have been expected to begin rising a few months later. But unemployment began to rise in March 1990, in anticipation of the onset of recession, as companies prepared for a drop in demand by cutting back on staff, or cancelling recruitment activity.

This was not the only surprise. The rise in unemployment, from 1.6 million to a shade under three million, was sharper than might have been expected given the scale (if not the duration) of the recession. Employment dropped by two million (not all of which was reflected in a higher unemployment total) with half the fall occurring in manufacturing, a sector that everyone understood to have completed most of a necessary rationalisation process by the mid- '80s.

All this, of course, did not simply reflect legislation change s. In the bad old days, firms used to hoar I labour during downturns, even if workers were ridiculously underemployed. The rationale was that it made sense to hold on to tried, trusted and skilled employees, or else problems would arise when demand returned to normal. Such tactics may have made sense in the '50s and '60s when unemployment remained I relatively low, even during cyclical downturns. But they carry little resonance today. Even at the end of the late '80s boom unemployment was, by past standards, very high.

The more aggressive retrenchment policies followed by UK industry (and services) in the recession had a highly beneficial impact on company 20 profitability. The company sector emerged into the upturn financially stronger than could have been reasonably expected and this was clearly a good thing.

But the sharp rise in unemployment had a disastrous effect on the public finances. And this was not just due to the mechanical link between rising unemployment and increased social security spending, as well as the reduction in income tax revenues that resulted from a smaller employed workforce. It is my belief that, in addition to these factors, the Government was encouraged to loosen its grip on public spending in areas not directly related to the unemployment rise, to buy political popularity which had been badly damaged by the recession. …

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