Liberating the Labour Market
Employment Rights Bill a stealth tax on workers, warns new IEA report
By Len Shackleton
Mandated employment benefits function as a ‘stealth payroll tax’ that ultimately reduce workers’ wages, not employers’ profits
£5bn cost of new mandates in the Employment Rights Bill will be passed on to employees through smaller pay rises over time
New union powers could revive 1970s-style militancy, and the whole package will reduce economic growth
The Employment Rights Bill returning to parliament today (Monday 14th July) will impose a £5 billion stealth tax on British workers, according to a new report published by the Institute of Economic Affairs. The analysis warns that employment mandates, sold as helping workers, really function like hidden taxes that reduce their wages over time.
Professor J.R. Shackleton, the report’s author, argues that politicians exploit public misunderstanding about who really pays for employment rights. They often only benefit certain groups, but the costs are passed back to all employees through lower wage increases than they would otherwise receive.
The Employment Rights Bill’s measures – including day-one unfair dismissal rights, restrictions on zero-hours contracts, and enhanced union powers – will also make employers more risk-averse in hiring decisions. This will put a brake on the growth the government seeks to achieve.
The report, Liberating the Labour Market, reveals how Britain’s labour market freedom score has already plummeted from 81% on the Heritage Foundation’s Economic Freedom Index 20 years ago to just 63% today, undermining what was previously a key competitive advantage for the UK economy.
In addition, Shackleton warns that new union powers could trigger a return to 1970s-style industrial militancy, allowing unions to “put the public through the wringer” and “extort more pay from the government – which means, of course, the taxpayer.” The Bill makes strike ballots easier to organise and extends strike mandates to a full year without re-voting.
To prevent this scenario, the report suggests Britain could eventually have to follow international examples by banning strikes in essential services. Germany bans civil servants, university staff and many teachers from striking, while the US prohibits all federal employees from taking industrial action.
Other key reform options to liberalise the labour market include:
Scrapping the failed apprenticeship levy system – The tax has reduced rather than increased apprenticeship numbers since 2017, with many businesses unable to access funds due to bureaucratic complexity
A comprehensive review of occupational licensing, currently covering 20% of jobs – Government certification is now required for estate agents, private detectives and social workers, often reflecting successful lobbying rather than genuine public protection needs
Refocusing discrimination law on direct discrimination only – Abandon complex “equal value” comparisons that force employers to pay warehouse workers the same as retail staff, and end mandatory pay gap reporting that leads to counterproductive hiring decisions
Introducing no-fault dismissal with guaranteed compensation – Replace the current complex tribunal system, currently involving 25,000 unfair dismissal claims a year, with a simpler approach where employees receive predetermined compensation without lengthy legal processes, giving both sides greater certainty
Reforming university funding to link institutions’ income to graduate employment outcomes – Universities should bear some financial risk if their graduates struggle in the job market, incentivising institutions to focus on employability rather than just recruitment numbers
Professor Shackleton, Editorial and Research Fellow at the Institute of Economic Affairs and Professor of Economics at the University of Buckingham, said:
“Politicians love to announce new employment ‘rights’ because they think employers pay the bill – but that’s an illusion. Every mandate, from parental leave to holiday entitlements, acts like a stealth tax that gets passed back to workers through smaller pay rises than they would otherwise receive. The only difference is that no money is raised for the Exchequer."
“The Employment Rights Bill will make this much worse, imposing billions in hidden costs that workers will ultimately bear themselves. The Government is not protecting workers – it is harming them and undermining its own alleged number one priority to boost economic growth.”
Good piece Len. You are right, there is always a cost to be passed on for rights’ on the one hand, in this case the worker, and more imposition on the employer on h ed other hand.
Hi again Len! I’ve come back to your podcast now, after viewing the IEA podcast yesterday with Reem, Tom and Kristian. In the main because you all mention ‘illusion taxation’ which I have been thinking about myself for many years and its impact on the economy. You are right, workers rights are a future burden on business for sure. Each business is different. But from your discussion comes for me, the same old argument and red herring that, the private sector pays for the public sector!…. Unless we get over this misconception all other arguments take the wrong path. To explain we really have to go back to basics! What is work? And how do we exchange it?? Work is work! It matters not who you work for or if you are self employed, in the public or private sector, work is work. It doesent matter if all public functions were private functions the same fact applies. For example a council can directly employ a bin man. And pay him to be in the public sector. Or the council can employ a bin man from a private company! In the private sector! As you know Len, Councils and governments have changed since the seventies. By outsourcing their responsibilities to private companies. But work is work and fair exchange is in both sectors. But fundamentally, one sector does not pay for the other! They are both just groups who cohabit. All work is a service and all employment is a need regardless of which group. No, everyone is ‘equalised’ by the exchange of money regardless of sector. I used that term equalised because it’s the ‘exchange of work’ as being equal not pay! We know pay is unequal and that’s another problem but, without the power of SPENDING from both sectors, the private wouldn’t profit. Their profits are made from both sectors SPENDING. Without spending neither would exist. That work is rewarded by money, and then it is exchanged with each other with SPENDING. So our economy is first money, followed by SPENDING. Not earning! No, earning is work but it’s not always paid or properly rewarded. And getting paid is not in itself a full four dimensional economy. The economy comes when that work and the exchange of money and value is realised through SPENDING in a hopefully ‘fair’ exchange of work between the two sides of that equation. …. Len, this needs careful consideration and understanding. Why? Because it is a fundamental lowest denominator. Exchange of work with money. …. If you were building and designing an economy system now it would be so different from the seventies or the Victorians say. Because they didn’t have computers and internet banking then! So, all bets are off now! As now, we can follow every penny and properly guide it with legislation that governments in the seventies couldn’t do! … back to our economy, we have the opportunity to see money being used or not used. We can see where money is, who has it and what is done with it. Never before have we had an alternative to cash money and after it’s spent we were used to just ‘hope’ and ‘Hard Work’ that it comes back again. Now, we can guarantee its return. How? Through SPENDING! If we streamline this path, the government machine will drastically reduce. It can become autonomous and perpetual. A far cry from the hope or despair we experience now. Coinage dates back many thousands of years! It’s the same system we have now and it’s totally out of date! As I see it, regardless of the jobs market and or despite overloaded bureaucracy it’s still a system that fails us. As a democracy we must accept that if a tiny minority become too rich the system must make that imbalance return the scales to the centre where the majority of people reside. At present the balance of the seesaw is heavy in favour of the few with the vast majority of us now hanging in thin air! The monetary imbalance must be returned to equilibrium by ensuring the weight of money returns to the centre thus balancing out the injustice of overwhelming wealth and the overwhelming need for the poorer majority’s need for the return of money via SPENDING’ it back. I’m all for working hard, earning as much as you can individually or as a collective in a company . Reward effort, skills, brains or brilliance! But that social contract must ensure that, reward is exchanged by the SPENDING of that money back again. As without its SPENDING the cycle or conveyor belt can’t flow perpetually and autonomously! We face the problems now as a result of this unworkable system. It’s failed us for centuries! Use our new found ability and make an economy that runs! On all cylinders!! Not an engine that stutters on two cylinders if we’re lucky, as it stops starts and fits again to a trickle! …..An economy is reliant on just a few things. Work from workers, sufficient money to exchange all that work and crucially a way to ensure that money really rotates and returns without just a hope! ….We can now and need to make that happen on a daily basis or at least monthly! We need a way to incentivise work effort with excellent pay not a derisory amount that maintains poverty! We need a system to provide proper pensions! For all! And proper tax revenue from a highly efficient economy working flat out with a guaranteed money supply by ensuring ALL money is flowing ALL of the time! That’s utopia! Not the protectionism we have now. We have low pensions, low benefits, low tax take and a system that allows the few to hold what we all need, money! Whether it’s banks, pension firms, insurance companies, rich individuals , Countries or anyone holding money abroad, we need our money back thank you very much!!! ….My view is bring back exchange controls. Don’t allow any money outside the UK. Even foreign companies or individuals. They need to have a bank account here to trade. They can only spend what they earn in the same way and in the same time scale as everyone here. That way you get equal trade! Something Trump wants! Money has to stay, goods can flow…..Tax illusion is a frightening fact! Who pays tax and why and what triggers taxes? Taxes like income tax and NIC are wrongly assumed to be paid by employees! Why? Because it shows in their pay slips and the word ‘income’ appears in the heading! No! It’s not paid by the employees! Its like daylight robbery! We all work hard, get paid and can’t enjoy that money by spending it! No, It’s akin to a Bernie Madoff style con! It’s just a statement! It shows you getting it but you never get it! Talk about illusion! But it gives the impression that workers pay more tax than non workers! And that’s an illusion too! In fact workers and non workers pay the same taxes! Vat, Duty and Council tax amongst others. Workers and non workers pay the same taxes pro rata of income. Why is this important? Well, if you realise all people actually pay the same taxes you begin to see that keeping it an illusion points the finger of the worker at non workers as a cost they don’t want to suffer! Rather than look the other way at those who hold all the money for months, years or centuries on end making us all devoid of it!.. the non worker is a mirror of the worker. They are the pensioners of yesterday. They are the disabled and the sick, the unemployed or the unemployable! All of which could come from those workers and will be one day! They are all of society, even the rich can be, non workers. pensioners, disabled, sick, unemployed or unemployable at any time! There is no difference. None. No, the main difference of factors in truth isn’t workers or non workers, public or private sectors, employed or self employed no! The lowest denominator is those who ‘SPEND ALL THEIR MONEY’ each month and those who ‘DONT SPEND ALL THEIR MONEY’ each month. These are the defining factors to how our present economic factors work in relation to taxes and tax take. If you spend all your money each month you contribute 100% of income to the tax paying system. But, conversely, those who don’t spend all their monthly income, pay no tax on unspent and unused or idle money! None! No tax is triggered at all! It’s a fact that all taxes are triggered by spending or money having to change hands. So if money doesn’t change hands or it’s not spent no tax is triggered or collected in revenue. There is the problem! Right there!