Labour market policy and employment law under a Keir Starmer-led government: a recent report may offer a crystal ball

In 2022, the Labour party published its New Deal for Working People Green Paper containing proposals for reforming workers’ rights within 100 days of coming to power (see here for our article series commenting on the proposals). It remains to be seen which commitments will make it into the final manifesto but it’s clear from the Labour Party conference last October that the manifesto will be based on the Green Paper.

Looking longer-term, further implications of a change of government might be gleaned from Ending Stagnation, the final report of the Economy 2030 Inquiry, a collaboration between the Resolution Foundation and the Centre for Economic Performance at the LSE. The report’s analysis and proposals reflect a shift from neoliberal economics and populist politics to the more technocratic and interventionist approach to policy we are likely to see from any Labour government.

One of the report’s authors is Torsten Bell, CEO of the Resolution Foundation, who was described by the Daily Mail as “the living embodiment of Labour thinking and policy” and in last year’s New Statesman’s “Left Power List” as “long being linked to an eventual move back to parliament”. As well as Bell and other authors at the Resolution Foundation, the report brings together expertise from business, academia, government and international bodies. It involved original research, is backed by a wealth of comparative data and took three years to complete. It is a comprehensive and impressive analysis of the state of the nation, and its importance was signalled by the fact that both the Chancellor of the Exchequer and Sir Keir Starmer (the leader of the Labour party) attended its launch.

In this article, we sum up the report’s key conclusions and recommendations and explore what they tell us about the likely approach of a Starmer-led Labour government.

Resolution Foundation report: the need for a new economic strategy

The thrust of the report is that the promise of shared prosperity, which is key to our social contract, is under serious threat and that a new economic strategy is needed for the British economy to thrive. It sets out how the UK’s comparatively poor economic performance in recent years is primarily attributable to low growth, stagnant incomes and high inequality.

Mainstream political parties in the UK all recognise the significance of growth in addressing the UK’s problems. The consensus, however, breaks down at the steps required to tackle these issues. In this report we can crystal-ball-gaze at how policy may well change with a change of government.

It’s not all gloom and doom

The report acknowledges that we should not see the prospects for the UK as total gloom. The UK has experienced low and volatile public and private investment, but the returns on that investment have not been low in comparison with other countries. The country has a world-class university system with world-class research in many areas. Strengths include its creative industries, finance sector and high levels of employment. Being a nation of English speakers advances cultural and educational exports. Being sited geographically on the Northeastern edge of the Atlantic, the country is also less vulnerable than many to climate change and well placed to generate renewable energies.

Key observations from the report cover the size and shape of the British economy and its potential for success. These include:

• The UK’s strength is in services (we are the world’s second largest exporter of services) and services will be the main source of economic growth.
• Fortuitously, the UK’s areas of strength coincide broadly with the areas of greatest likely global growth.
• Manufacturing is important, particularly in certain narrow sectors (e.g. pharmaceuticals), but will not be the driver of growth or jobs.
• The economy needs shaping, recognising that in a liberal market economy there is a place for governments to influence outcomes.
• Having slipped well behind comparator countries such as Australia, Canada, France, Germany and the Netherlands, there is huge potential for the UK to catch up and increase its prosperity.
• The country is “living off its past, not investing in its future” and “cannot go on like this”.

The report’s recommendations on economic strategy

The report then goes on to explore how to tackle the scourge of stagnation amid the challenges of geopolitical realities, demography, technology and sustainability (trends I also explored in my Eight Drivers of Change reports).

The report’s key recommendations include focussing on high-value sectors, shifting resources from the least productive firms to the most productive, and setting our sights on cities outside the Southeast, particularly Manchester and Birmingham. The focus on the UK’s strength in the services sector should drive new trade in services agreements with countries such as Singapore, Australia, Canada, Switzerland and Japan (such as the Berne Financial Servies Agreement between the UK and Switzerland signed just before Christmas last year).

Brexit

Noting that we need to move on from half of the debate denying Brexit’s costs and the other half denying its realty, the authors’ analysis shows that, whilst the impact of Brexit on trade in goods has been marked, the same cannot be said about the trade in services which has proved resilient. The report does not look to rejoining the single market never mind the EU itself. It advocates becoming part of the EU’s customs territory and single market for goods (which it emphasises is not the same as rejoining the single market as a whole) but not free movement of capital, services or people. It refers to this as a “UK Protocol” (but this suggestion seems politically unlikely, not least because rejoining the single market for goods (or indeed the single market in its entirety) without rejoining the EU would leave the UK as a “taker” not “maker” of the rules).

Migration

Attracting skilled migrants is considered an important pillar of an economic strategy as well as a prerequisite for enhancing trade in services. The report notes how Brexit is driving a shift from free movement to migration based on skills and salary thresholds, resulting in those coming to the UK on average being more highly skilled, but that this will neither drive a high-wage economy nor have significant negative effects.

Net zero transition

 The report concludes that net zero transition is neither a silver bullet for growth nor a catastrophe that will hold it back. It says that the main impact of this transition over the rest of this decade will be to alter the economy rather than shrink or grow it. According to the report, jobs will be changed rather than created or destroyed.

AI

The report states that “while the eventual impact of AI is hugely uncertain, it’s clear the robots we were promised would imminently take our jobs and raise our productivity have done neither.” The authors note that alarm at “job-killing robots” has proved, to date, misplaced and that “the economy forged by these [technological] changes has always eventually created new opportunities for employment to replace the lost jobs – as today’s near-record UK employment rate affirms”. It concludes that “the specific issue of how [AI] will impact work overall is best classified as ‘radically uncertain’.” (This seems unsatisfactorily dismissive of arguably the biggest potential disruptor to the UK’s labour market and its economy as a whole in the years ahead - see my report on the Future of Work in 2050 for a fuller discussion of these issues - but the authors do acknowledge that “the past is an imperfect guide to the future”).

The world of work: how it must evolve to drive growth

Throughout, the report makes various observations on the labour market’s role in driving growth and increasing equality. These are the ingredients, it advances, for ending economic stagnation.

Employment in the services sector

Services are and will continue be the main source of jobs. Services account for over 80% of jobs in the UK, a percentage which is increasing. Manufacturing remains important but re-industrialising and concentrating on rebuilding the manufacturing sector is argued not to be the way forward for the UK. Even within the services sector there will be, and needs to be, shifts. For example, the hospitality sector may decline as low pay and inequality are addressed and costs increase as a result.

Dynamic labour market

The UK has a liberal labour market, characterised by relative ease in hiring and firing. But a dynamic labour market also requires empowered workers willing and able to take risks in moving jobs. Shifts in sectoral employment are at the lowest level for 90 years and this, the report points out, is curtailing economic growth.

As well as giving workers the confidence to move jobs, the report highlights the need to raise employment standards and pay in order to push people into higher paid jobs in higher productivity sectors.

The UK already benefits from comparatively high levels of employment. Increasing employment rates further means focusing on three groups of the economically inactive: older workers; mothers (and it refers throughout to mothers and not parents) with young children; and the sick or disabled. Inadequate and over complex childcare support, for example, is identified a barrier to workforce participation of parents, particularly mothers. Politicians across all major parties have already identified the alarming rise in long-term sickness as a concern but take different views on the solutions. The report highlights that steps will need to be taken to prevent workers with long-term health conditions having to leave the workforce in the first place.

The report reviews the rapid growth in self-employment in the UK and notes that this has not been seen elsewhere. It is clear to the authors, however, that increased self-employment does not represent the route to a more dynamic economy.

The long-term impact of Covid on work is the shift to hybrid working. This has not resulted in a transformation of the country’s economic geography or productivity foreseen by some at the time but, the report notes, has helped wellbeing and has resulted in more mothers being able to work full-time.

Training and education

The country has a world-class university system. School attainment at 16 is reasonably good in comparison with similar economies. But the number of British workers qualified at sub-degree level is too low and, it is asserted, the UK needs more, not less, education. Employers also need to play their part and to increase the training their workers receive, and government needs to do more to incentivise worker training.

Worker voice

Whether through trade unions or worker representation, the report argues that a lack of “worker voice” in decision-making is holding back the country.

The role of trade unions remains important and the reduction in union membership across the workforce, the report notes, has largely been due to an absence of unionisation in new firms rather than de-recognition.

One factor the report identifies as contributing to low investment for long-term growth is a lack of pressure from empowered workers to invest for the long-term.

Ageing population

 An ageing population poses real challenges across many economies. The UK is less vulnerable in the short-term than many other similar economies, with a short-lived bulge of births between 2007 and 2012. The report identifies pension reform as a priority in meeting the challenges of the ageing population but also in generating extra funds for investment to stimulate British business. The report recommends consolidation of UK defined contribution pension funds, echoing plans outlined by Labour.

Equality and security

The report argues that “good jobs with decent pay and conditions” should be the norm everywhere. High levels of inequality are highlighted as part of the toxic double act with low growth, holding back the UK. The report concentrates on income inequality, rather than discrimination, although it does touch on some group disadvantages (for example, its recommendations include greater job security for the disabled).

Insecurity is argued to be intertwined with inequality as insecurity over hours, insecurity when sick and job insecurity are more acute amongst the low paid. The report’s authors highlight the link between greater job security and job mobility, stating that that “stronger rights at work would make taking a leap for a new job more of a promise, and less of a threat.”

The report is somewhat dismissive of all the “talk” by businesses of their environmental, social and governance credentials. Tackling inequality, it says, requires more than talk about ESG issues but good work as a central plank of economic strategy coupled with reform to tax and benefits to ensure rewards and sacrifices are equitably shared.

The Danish flexicurity model is looked at admiringly. Here, Anglo-Saxon labour market flexibilities have been successfully married to more generous benefits and higher investment in support and training to help workers find jobs or move roles.

Tax and benefits

Taxes, we are reminded, are high by historic standards (though lower than comparable European countries) and will remain high. The report argues that wealth should take more of the strain and employees less, as household wealth has tripled as a proportion of GDP over the last 50 years whereas taxes from wealth are little changed as a percentage of GDP.

Net taxes, the report predicts, will have to rise further but need to be better (simpler, more efficient and fairer) not just higher.

The authors also target benefits reform, pointing out the dramatic impact of benefit cuts on inequality over the last 15 years but also the role unemployment benefits play in giving the workers the security to change jobs. The report also points to the role statutory sick pay (SSP) plays in providing security so that “you know that you will have breathing space if for some reason, most obviously sickness, you cannot work for a spell”. Changes to childcare benefit rules are also argued for to enable more mothers to work full-time.

The Ending Stagnation report’s recommendations for employment law and Labour’s proposals

The report goes on to make various detailed recommendations for reforming employment law. These are summed up below, along with comments on how Labour’s existing proposals already align with them.

Worker voice

• Good Work Agreements bringing workers and employers together to solve sector-specific issues, including training, pay, health and safety and terms and conditions, starting with the care sector (called “Fair Pay Agreements” in Labour’s Green Paper but covering similar issues).
• A right for unions to enter workplaces to raise awareness; granting union recognition if a simple majority vote for this on a turnout of at least 40%; and permitting on-line voting. (Labour’s proposals include the right to enter workplaces and permitting online balloting but include less detail on how it would change thresholds for recognition).

Equality and security

• A new right to a minimum hours’ contract reflecting the worker’s usual work pattern (effectively banning zero hours contracts) and two weeks’ notice of shifts with compensation for late changes. (Labour would do the same but is less specific, talking of reasonable notice of shifts).
• Reducing the qualifying period for unfair dismissal to one year. (Labour’s Green Paper actually goes further and proposes “Day 1” unfair dismissal rights, but the importance the report attaches to labour market flexibility may explain this difference).
• SSP to be increased to 65% normal earnings. (Labour originally said it would increase SSP levels but has since rowed back from this pledge, according to Labour List).
• A national living wage of 73% of median pay by 2029 (equivalent to £14 per hour on current forecasts). (Labour is less specific. The Green Paper stated that it would immediately raise the National Living Wage to £10 per hour and then ensure that each rise was “adequate and addresses the rise in the cost of living and inflation”. This has been overtaken by events with the government already having announced that it will rise to £11.44 per hour in April).
• A Single Enforcement Body with greater resources, issuing meaningful fines, increased enforcement powers for employment tribunals and the ability to file a “super-complaint”. (Labour also proposes a single enforcement body).

Tax and benefits

• Universal Credit and childcare support should be reformed to ensure work pays for mothers (no mention of fathers) with a long-term strategy to move eventually to universal childcare with direct government funding support. (Labour’s Green Paper is less targeted on working mothers and states that it “will replace Universal Credit with a social security system that allows low-income earners on benefits to keep more of their take-home pay”.)

Other suggestions not found in Labour’s Green Paper include:

• A new right to return period (based on maternity leave) during which employers must keep open jobs for people who are away from work due to ill-health or disability.
• A new apprentice guarantee with government funding for all qualified young people with two-thirds of the apprenticeship levy ring-fenced for the under 25s. (Labour proposes reform of the apprenticeship levy turning it into a growth and skills levy giving employers greater flexibility as to how the levy is spent).
• Worker representatives on boards in firms with over 200 employees (in 5 to 10 years’ time).
• Levelling up employee and employer minimum pension contributions to 6%.
• Marginal tax rates should be equal across all forms of income including employment income, self-employment earnings, dividends, real capital gains and rental income.
• Ending punitive effective marginal rates of income tax (end the claw back of child benefit at £50,000 and of the personal allowance at £100,000).
• Indexing benefits with earnings so the “replacement rate” does not fall further.
• A new earnings-related unemployment insurance to encourage labour market dynamism.

Conclusion: a glimpse of things to come?

The Ending Stagnation report offers clues as to how a Labour government will approach labour market regulation and employment policy. We could expect a new Labour government’s thinking to be generally aligned with the report’s analysis and arguments.

Interestingly, the report advocates a one-year qualifying period for unfair dismissal and not Labour’s “day 1” proposal. It trumpets the UK’s flexible labour market. This may give Labour policymakers pause for thought. Will Labour backtrack from “day 1” rights in its 2024 election manifesto?

In other respects, the report’s conclusions tend to support the case for the reforms outlined in Labour’s Green Paper. The report’s new ideas and added detail are especially interesting, as they offer a possible glimpse of reforms to come in the longer term, assuming a Labour government is elected. Will we see proposals for employee representatives on boards of larger companies later in a Labour government? What about the interesting idea of a right to return to work after sick leave modelled on maternity rights? Although apparently abandoned for the time being, will more generous SSP payments be a feature in due course of Labour changes? Will we see major pension reform under a Labour government to prepare for an ageing population and to release savings for investment into the economy? What about a major expansion of the apprenticeship levy? Tax and benefits are both political minefields but how closely will Labour follow the report’s recommendations in time?

Time will tell, but if the pollsters and bookmakers are right about a change of government later this year, then we can be clear that we face change on a scale not seen for many a year.