Does it pay to be flexible?

Protesting workers Image copyright Reuters
Image caption Would making it easier fire workers help the economy grow or just make workers more angry?

The OECD reckons that the UK already has one of the most flexible labour markets in Europe. As we know, it has been performing remarkably well, creating jobs at a time when national output has been flat.

But ministers seem to hope it will do even better, if they make it slightly easier for companies to make people redundant (see news story ("Redundancy talks period to be cut").

The idea is that firms and their workers will do even better in the long run, if the employer can cut costs more quickly, when trouble strikes. The change might also make firms more keen to take on workers, when demand picks up.

That's the theory.

But economists say the practical consequences of making it easier to hire and fire workers are not so clear-cut. (See, for example, this rather pointed blog, by the director of the Centre for Economic Performance .

Falling wages

Flexibility when it comes to wages is usually good for employment and for businesses - especially in a downturn, though it's not much fun for the workers themselves.

If pay can go down as well as up, employers can cut costs without laying people off, people who might be hard to replace when business is better.

One reason why employment has held up so well is that Britain's workers have indeed been very flexible in this sense: real average wages have been falling almost continuously since 2009.

The economist Steven Nickell, now a senior member of the Office for Budget Responsibility, has spent a lot of time in this area, comparing experience in 20 advanced economies .

He concludes that other things can also affect the level of employment: the way you design welfare benefits, for example, or the kind of support offered at job centres.

But he didn't find much evidence that making it easier to fire people made a big difference.

If it discourages firms from seeking other ways to cut costs, some think that loosening employment protections could actually be counterproductive.

The proposed change in redundancy notice is a relatively small one. It's possible that future academic studies will find it hard to spot any impact at all, whether positive or negative.

Still, the lesson of international experience seems to be that it pays for to have a flexible labour market - but it needs to be flexible in the right way.