Nick Martindale 31 Oct 2017 02:48pm

Flexible Balance

In today’s global economy, a country’s labour market can be a source of competitive advantage. But how flexible should a country strive to be? Nick Martindale asks if there can be too much of a good thing

Caption: A flexible economy means businesses can expand. Photography: chuttersnap/unsplash
In economic parlance, flexibility is generally seen as a good thing. A flexible economy and labour market tend to mean businesses can expand and contract their workforce as required, without having to make expensive, long-term commitments, which means they’re more likely to recruit. Flexibility can benefit workers, too; with individuals able to drop in and out of the labour market as it suits their life, and work for more than one business if they need to.

But countries inevitably have different approaches to just how flexible their labour market really is, depending on factors such as the maturity of the economy and the degree of legislation around worker protection. It’s also worth noting, says Mark Pearson, deputy director for employment, labour and social affairs at the OECD, that not all countries have the same objectives. “On the one hand you want labour markets to be resilient so they can cope with crises and adapt to new challenges, but those which do those things best are not necessarily best at other objectives like having equitable outcomes, or might correlate with high rates of disadvantaged groups being excluded,” he adds.

The US is perhaps the ultimate example of a country that takes a hands-off approach to labour legislation, says Pearson. “It generally lets the market work and that has worked very well for them, although with massive inequalities, and that may be the point,” he says. “If you can stand those massive inequalities then giving that flexibility to companies is clearly a way of getting both micro and macro flexibility.”
He also makes the point, though, that workers’ rights do not automatically make a labour market less effective; arguing that being unable to dismiss people whose roles have become redundant – or having to pay people a minimum wage – forces businesses to invest more in training in a bid to increase productivity.

The UK is generally regarded as a good model to follow, combining a relatively high degree of flexibility with worker protection. “It’s relatively easy to hire and fire,” says Jonathan Portes, professor of economics and public policy at King’s College London. “One thing worth mentioning though is that the UK has relatively strong provisions on protection against discrimination and unfair dismissal. So although on some flexibility indices the UK scores similar to the US, that’s quite wrong. In the US you can almost hire and fire at will, but it’s much more difficult in the UK.” The UK is also a strong enforcer of employment law, he adds, particularly around areas such as gender and race discrimination.

In recent years, however, the trend towards so-called flexible ways of working has come under pressure in the UK. “Broadly, this model of a fairly high degree of flexibility and reasonably high degree of basic protections served the UK pretty well until the crisis,” says Portes. “Since then, it has done rather well at protecting us against the large rise in unemployment and ensuring that the employment numbers recovered after the crisis. But the growth since the crisis in self-employment and zero-hours contracts reflects the fact that it’s not working very well at all now.

“In practice it is clearly not optimal from an economic and social point of view to have complete flexibility,” he adds. “The question
is what regulations or institutional frameworks do you have, and a consensus view is that you should aim for a labour market that is relatively flexible but which provides a pretty decent level of minimal protection, and you try to avoid multiple different labour markets. You don’t want people in permanent contracts having much more protection than those in temporary contracts."

Other countries have done a better job of combining the flexibility of such arrangements with a degree of protection, says Manuela Galetto, assistant professor in employment relations at Warwick Business School. “In Germany, even though there is quite a high use of temporary contracts, it’s often a stepping stone into more permanent jobs,” she says. Other countries, such as Sweden and Denmark, offer more in the way of support from the state for self-employed workers, either around training opportunities or financial measures such as income protection schemes to support those facing periods out of work, she adds.

Scandinavian countries also tend to provide a better deal for women and older workers says John Hawksworth, chief economist at PwC, which publishes research around how the various OECD countries compare in their treatment of particular groups. “They have a positive attitude to keeping training going for older workers or having good childcare arrangements for women so they can get back to work after having children,” he says. “That’s also an important factor in what labour markets actually deliver in terms of employment rates in different demographic groups.”

New Zealand also caters well for older workers and women, he adds, while Germany, Austria and Switzerland tend to provide more apprenticeships for younger workers. “Ultimately if you want to have a strong economy you need to make good use of your workforce,” says Hawksworth. “You need to look at it from the perspective of the economy as a whole, not just of your workers.”

Unions also have a role to play in helping to create a flexible labour market, which ultimately generates employment and prosperity. Hawksworth gives the example of Germany, where unions have a strong history of working closely with employers on supervisory boards, and were able to agree to working time reductions to help safeguard jobs during the economic crisis. “It’s not necessarily the case that having stronger union representation produces a worse outcome,” he says. “Where it becomes difficult is when it’s quite an antagonistic relationship, such as in the UK in the 1970s, where it gets in the way of necessary process improvements and can act to protect the insiders who currently have jobs at the expense of the non-union members.”

Germany has fared very well in recent years, agrees Pearson, although he also points out that it is not without its problems. “It has too many low-paid jobs,” he says. “It set up special rules that reduced social security contributions for people who are working really quite short hours for very little pay, and it’s become a bit addicted to that sort of employment. It really needs to roll those back and get people currently in privileged but not very high-earning jobs into something more substantial.” Female employment also remains disappointingly low, he adds.

Southern European countries also tend to suffer with significant differences in the labour market, says Pearson, pointing to the proliferation of temporary contracts in places such as Italy and France. “This is a disaster; of all the things you can do to a labour market, creating a dual-labour market is the worst because it means it’s much harder to adjust in an equitable way,” he says. “It means that when a crisis hits you have some people in employment contracts who are very well protected and others on temporary contracts, and all the adjustment costs go on the people with temporary contracts, and they get pushed out of the labour market.” These generally tend to be younger people, he adds, which in part accounts for high levels of unemployment in places such as Spain.

The influence of unions has also had an impact in southern Europe, he adds, with collective agreements struck with employer organisations and the state, even though membership of both unions and business groups is often low. “That means that many firms and employees aren’t represented when these agreements are made and it extends agreements across companies and workers who can’t cope with whatever has been agreed at the national level because it doesn’t reflect their local circumstances,” he says. “That inflexibility means you start losing jobs, flexibility and dynamism in the economy.”

France also suffers from both a dual labour market and overly powerful union influence, which can lead to sectors of the population being left out of the traditional employment market, says Portes. “People who have a permanent job do very well and everyone else does badly,” he says. This often affects groups of young people of north African descent, he says, which has caused societal issues as well as economic ones.

Reforms in Southern European economies and moves to scale back some of the excesses of the less regulated economies have moved most major developed labour markets closer together. “There are very slow movements, with Germany and the introduction of the minimum wage, the French trying to reduce their labour market regulation and the labour market legislation in Spain, which tried to reduce some of the dualisation of the labour market,” he says. “There is a convergence towards having a bit more flexibility while also having a reasonable level of protection.”


The ability for people to move freely across borders is a feature of a flexible labour market, but relying on it can be a risky strategy for countries, employers and employees alike.

Matthew Rideout, director of business at ICAEW, gives the example of the UK, which has become heavily reliant on overseas labour in sectors such as agriculture. “The difficulty everyone is facing now is that when all this movement of labour started, prospects in people’s own countries and pay rates were pretty low, and those have now changed,” he says.

“Even before Brexit, farmers were already struggling to get people who they have historically got to pick crops on a seasonal basis.” The situation became worse in the wake of the Brexit vote, he added, with the collapse in the value of the pound making it less attractive for overseas labourers to work here.

Other sectors such as hospitality and the automotive supply chain are also dangerously reliant on overseas workers, he adds. “We have a flexible labour market but it’s not because of our own nationals,” says Rideout. “It’s because the people coming in are more flexible than our own workers.”
Recent figures from the Office for National Statistics suggest that Brexit has yet to significantly hit the numbers of people coming into the UK from the EU, but any post-Brexit restriction on the movement of labour could also have a damaging impact on the availability of staff in certain sectors, and the flexibility of the UK economy as a whole, warns Gerwyn Davies, senior labour market analyst at the Chartered Institute of Personnel and Development.

“It seems inevitable that free movement will end but there is an admission in some of the consultation papers that we do need low-skilled labour in some form,” he says. “It looks as if the government is looking at a more flexible model than many people had initially feared.”

Becoming less reliant on low-paid workers coming from overseas could also be positive for the economy in the long run, believes Rideout. “Our fall in productivity is partly because we have got used to very low labour costs,” he says. “If you can’t get the labour or it’s too expensive then you have to invest in machinery, which historically you wouldn’t have done without this inflow of cheap labour.”