Reaping the productivity dividend: How the employment rights bill could impact growth

Once the bill receives royal assent it will, overnight, substantially improve trade unions’ ability to access and organise new workplaces. Over the following months and years workers will become entitled to sick pay, parental leave and protection from unfair dismissal from the first day of employment; there will be new duties on employers to prevent sexual harassment of their employees; and everyone working on a zero-hours contract will have access to a contract with stable hours. These are just a handful of the most eye-catching measures in a wide-ranging piece of legislation which covers 28 distinct areas of employment law.

Reforming UK labour law is long overdue. The last major change to labour market regulation in Britain was the introduction of the minimum wage in 1999. The national minimum wage has been a remarkable success, reducing hourly pay inequality and significantly boosting the wages of Britain’s lowest earners. But insecurity remains a pervasive problem in the UK’s labour market: from zero-hours contracts in social care to gig-work delivery jobs, precarious work has become a ‘structural injustice’ that erodes the incomes and livelihoods of millions of workers, many of them low-paid. The employment rights bill represents a significant step forward in the regulation of precarious work.

Many of the bill’s most impactful policies have the potential to make workers more productive, which would boost overall economic growth. But the government’s assessment of the bill’s impacts may underplay these benefits: the Department for Business and Trade acknowledges that it is easier to quantify the costs than the benefits of the bill, meaning their estimates may not take full account of potential benefits. This may prove particularly problematic for the chancellor, whose fiscal position in the budget will partly depend on how the Office for Budget Responsibility (OBR) assesses the bill’s impact on growth. If the OBR produces a more negative prediction of the bill’s growth impacts than is borne out, this could result in a costly and avoidable headache for the chancellor.

Here, we assess the potential growth impacts of the bill’s likely most high-impact policies. We focus on the four policies deemed ‘costliest’ for businesses as they have the greatest potential to be judged as depressing efficiency.* After outlining the government’s own estimates of the costs to business, we outline how these policies could improve labour productivity, and therefore growth.

Introducing a right to guaranteed contract hours

Policy: The bill introduces a new obligation on employers to offer a contract which reflects the hours that workers regularly work over a specific period. Details of the reference period will be determined after consultation.

Costs: Business will incur costs from handling and processing new contracts and the potential loss of flexibility for firms who currently rely on variable hours contacts for their business models. The magnitude of these costs will depend on the scope of the regulations, what employers need to do to be compliant, how many workers choose to accept or decline the guaranteed-hours contracts that they are offered and how employers decide to evolve their business models. The annual administrative cost to businesses is estimated to be around £230 million per year.

Benefits: Ending ‘one-sided’ flexibility could increase job satisfaction and physical and mental health, with productivity benefits. People with greater job flexibility and higher job security are less likely to experience serious psychological distress and anxiety. Insecure work is associated with poorer physical and mental health, which is linked to weaker productivity. Scheduling practices such as short notice of work schedules, irregular hours, cancelled shifts and on-call shifts are associated with psychological distress, worse sleep quality and unhappiness.

Investments in training and human capital enhance productivity, but casual and temporary forms of employment do not incentivise firms to make them. European industry-level data reveals that employer-funded training leads to a significant increase in productivity growth. But lower costs on fixed-term contracts may encourage firms to design low-productivity jobs, whereas better regulation of casual, fixed-term contracts could incentivise investment in human capital.

Compensating workers for cancelling or curtailing shifts at short notice

Policy: The bill introduces a new obligation on employers to provide workers with reasonable notice of their shift patterns and payment where notice of shift cancellation, movement or curtailment is short. Details such as the length of notice required for cancellation, movement and curtailment of shifts, or the amount of payment for short notice cancellation, movement and curtailment, are yet to be defined.

Costs: The cost of payment for short notice shift cancellation or curtailment on businesses will result from business administration costs and transfers in cancellation payments from firms to workers. Average administrative costs to businesses are estimated to be around £210 million per year.

Benefits: Penalising employers for cancelling or curtailing shifts at short notice is likely to encourage more consistent workforce planning. Peer-reviewed studies of US retail and hospitality sectors have demonstrated a strong empirical link between consistent workforce planning and productivity in low-paying sectors. A study of Gap stores in San Franciso and Chicago found that responsible scheduling practices increased firm-level productivity by 5.1 per cent. Another study found that consistency in hour-of-the-day and day-of-the-week scheduling for retail cashiers improved labour productivity by 0.95 per cent and 1.63 per cent respectively, rising to 3.39 per cent and 7.93 per cent for new hires. Labour productivity in American restaurants using last-minute scheduling was 4.4 per cent lower than those which used regular scheduling.

Protecting workers from unfair dismissal from the first day of employment

Policy: The bill will repeal the unfair dismissal qualifying period, currently set at two years, and replace it with a day one right. The government intends to ensure that employers can still operate probationary periods; ministers will prescribe the duration of the statutory probation period and the current test for what constitutes ‘fair’ dismissal after a consultation process. By introducing a day-one right to protection from unfair dismissal, the government is changing the UK’s unfair dismissal landscape from one of the least to most generous for workers in the OECD.

Costs: The impact on businesses is expected to be net negative, driven by the costs associated with additional early conciliation and tribunal cases, familiarisation costs, and admin costs from providing a written reason for dismissal. Annual direct costs to businesses are estimated to be between £41.5 million and £43.2 million. International economic evidence suggests that regulatory restrictions on employee dismissal depresses firm-level productivity. Evidence from OECD countries between 1982 and 2003 indicates that statutory dismissal regulations depressed productivity growth in industries where layoff restrictions were more binding. OECD researchers found that deregulating job protection in Italy increased total factor productivity by 1 per cent, with the productivity gains disproportionately benefiting capital owners.

Benefits: Employers might respond to abolition of the unfair dismissal qualifying period by improving their people management and hiring practices, which could deliver medium and long-term boosts to labour productivity. The CIPD’s spring 2024 Labour Market Outlook survey asked 2,000 employers how changing the unfair dismissal qualifying period would positively affect their organisation; 23 per cent said that reducing the qualifying period would encourage them to invest more in training for managers. Better management practices are strongly associated with firm-level productivity: greater investment in training for managers is therefore likely to improve productivity growth.

There may also be productivity benefits if this policy increases job mobility. Job changing is understood to improve productivity by matching workers to more suitable employment and by promoting innovation through the inter-firm exchange of experience. Workers may currently be disincentivised from changing employers if they know they will need to wait up to two years for protection from unfair dismissal. However, there is currently no empirical evidence to suggest that the current qualifying period is disincentivising job switching in the UK. More work is needed to understand the extent to which making protection from unfair dismissal a day one right would incentivise more people to leave their current jobs.

Making statutory sick pay accessible for all employees from the first day of employment

Policy: The bill will make statutory sick pay (SSP) accessible to all workers from the first day of sickness by: removing the lower earnings limit; removing waiting days; and reducing the number of days absence required to qualify as a period of incapacity for work.

Costs: Businesses are expected to face increased costs due to the higher number of employees that will become eligible for SSP. Currently, SSP costs to business are around 0.06 per cent of total annual spending on wages. The government’s policy will increase this to around 0.09 per cent, resulting in a £428 million annual cost for businesses.

Benefits: The government expects these changes will help address presenteeism and low productivity by providing financial support to all individuals when they are sick. Poor health and wellbeing are costly to both employers and the economy due to increasing absenteeism and presenteeism, with consequential impacts for productivity and economic growth. IPPR estimated that productivity hit from presenteeism has resulted in a £25 billion additional cost to businesses since 2018. The government estimates that businesses will enjoy a £17 million benefit from individual behavioural changes that reduce presenteeism in response to this policy.

Conclusion 

This evidence reveals a more positive picture of the employment rights bill’s potential growth impacts. The bill’s most high-impact measures will increase costs for businesses but also have the potential to boost labour productivity. Their overall impact on growth is therefore likely to be less negative than the government’s own estimates suggest.

It is likely to be easier for the OBR to score the bill’s costs than it is to estimate the potential benefits to labour productivity. If the OBR’s judgment is unduly negative, it could cause an unnecessary headache for the chancellor, adding to an already challenging fiscal picture ahead of the autumn Budget. It’s essential that more analytical effort is made to quantify the potential positive effects: we recommend additional investment in understanding the potential productivity impacts of the bill, and the government’s other policies.

Notes

*These are the four policies with the highest estimated cost to businesses in the Department for Business and Trade’s economic analysis of the bill.