Written submission from Professor Simon Deakin (ERB0095)
Response to the Business and Trade Committee call for evidence on
'Make Work Pay: Employment Rights Bill'
Professor Simon Deakin
Centre for Business Research, University of Cambridge,
Co-Investigator ESRC Digital Futures at Work Research Centre
December 2024
General
1. The Bill is the most important reform of British labour and employment laws for a generation, and as such a welcome development. In recent decades, worker protections in Britain have fallen significantly behind those in other high-income countries (TUC, 2024). During the same period, productivity growth has stalled, real wages have flatlined, and inequality has risen to a historic high (Dorling, 2023). These economic trends are not unique to Britain, but they are more marked here than in other OECD countries (Deakin, 2021).
2. The British labour market, and society more generally, are still suffering the effects of the deregulatory shock administered by governments of the 1980s and 1990s, when labour protection declined more steeply than at any other stage in the country’s recent history, and to a greater degree than in other countries going through similar deregulatory episodes then and since (Billa et al., 2025). The hoped-for benefits of deregulation – improved productivity and sustainable economic growth – have simply failed to materialise.
3. Thus a reset is essential. The Bill is going in the right direction but is only a first step. The ultimate destination should be a modern labour code, which protects rights at work, puts a floor under collectively negotiated terms and conditions, and guarantees worker voice and freedom of association in the workplace and across the labour market.
Protecting workers
4. The Bill will bring the UK closer to the OECD norm, but as currently drafted it will most likely fail to bring about effective worker protection in several areas seen as central to its mission. As space is limited, I will focus my remarks on two of these: fire and rehire, and day one rights. I will also address the wider issue of enforcement.
Fire and rehire: a collective remedy is needed
5. On fire and rehire, the solution set out in the Bill, of making it an automatically unfair dismissal to dismiss an employee for refusing a contractual variation, is not the most effective one available. Even if the exception for adverse financial conditions is narrowly construed, an unfair dismissal action will not bring about the outcome needed to protect terms and conditions, which is the nullification of the terms imposed by the employer and the restoration of the previous ones. Rather, what will happen is that the employee will either lose their job, or keep it but on the inferior terms, with only limited compensation in either case, given that an order for reinstatement is rarely awarded, and cannot be enforced (Employment Rights Act (‘ERA’), section 117; McKenzie v. Chancellor, Master and Scholars of the University of Cambridge) [2019] EWCA Civ 1060).
6. The Department for Business and Trade is consulting on extending the right to interim relief under ERA sections 128-132 to protect pay and conditions pending a hearing of the unfair dismissal claim. Such a reform would be useful but does not address what would happen if the employee wins in the tribunal but is ultimately unable to get reinstatement under section 117. Section 130, allowing the contract of employment to be continued, only applies at the interim stage, not to the period after the complaint has been resolved.
7. There are two possible solutions. One is to prevent an employer avoiding a reinstatement order by simply paying more compensation. A change to the law governing unfair dismissal remedies (section 117 ERA) would be needed to achieve this.
8. A second solution, which would apply where a fire and rehire is used to undercut terms negotiated in a collective agreement, would be to enable the trade union which was party to the collective agreement to make a complaint before the Central Arbitration Committee (CAC), which would have the power to reinstate the previous terms. This would have the advantage of providing a collective remedy which would avoid or at least minimise the need for individuals to bring unfair dismissal claims, and would take effect for a group of workers rather than one employee at a time. It would be a more effective disincentive for employers considering a fire and rehire, while not ruling out employers being able to show financial necessity in an appropriate case, which the CAC would be well placed to assess. There are precedents for such a mechanism (‘unilateral arbitration’) under previous labour legislation, for example, under the provisions of the Employment Protection Act 1975 relating to trade union recognition (section 15) and extension of sector level collective agreements (Schedule 11). This would go further, and be more effective than, the extension of the protective award provisions of the Trade Union and Labour Relations (Consolidation) Act 1992 (‘TULRCA’), which is currently being consulted on by DBT.
Day one rights and probation: a 9-month qualifying period would be out of line with international practice
9. The removal of the two-year qualifying period is a much-needed change, but is offset by the new provision for probation periods. Allowing a 9-month period for probation, with a residual unfair dismissal regime applying during this period, is equivalent to bringing back a lengthy qualifying period by the back door.
10. A nine month qualifying or probation period would be out of line with international practice. The relevant period is 6 months in Germany; in France, it is 4 months, but that only applies to managerial employees. In several countries there is no statutory provision for probationary periods as such, but the employer can show that a dismissal for probationary reasons is fair under the general law governing dismissal. Japan is such a case. Of those OECD countries where a maximum probation period is set by law, only Australia, Cyprus and Greece have periods of 9 months or more.
11. Consideration should be given to the Japanese approach of using general unfair dismissal law to deal with the issue of probation. UK unfair dismissal law is similar to Japan’s in allowing an employer to dismiss for reasons relating to capability subject to following a fair procedure. It is not clear, therefore, that a special regime for probationary dismissals (Sch 2, para 3(2) of the Bill) is needed. In practice it will either duplicate the general provisions set out in section 98 etc. of the Employment Rights Act 1996 (‘ERA’) or, in so far it as it departs from them, add to legal uncertainty.
Enforcement: expand inspection and collective arbitration
12. On enforcement, the list of ‘relevant labour market legislation’ in Schedule 4 Part I is too narrowly defined. The Bill gives the Secretary of State the power to extend it. Extending the power of the FWA to enforce a wider range of rights under the ERA and TULRCA should be the eventual goal.
13. Sanctions for breach of labour standards laws, including those relating to the minimum wage, are currently too weak to incentivise compliance by firms. The fines imposed on violators often do not cover the savings they make from non-compliance, and there is a low probability of detection and prosecution (Stansbury, 2024). Sanctions need to be stricter and the inspection rate increased.
14. There is scope to extend the role of trade unions in enforcing terms and conditions via arbitration before the CAC, as suggested above for the ‘fire and rehire’ situation. Collective arbitration was used up to 1980 to prevent employers from undercutting sectoral collective agreements. A collective remedy is much more effective in practice than individual claims before employment tribunals (ETs). At present there is a backlog of claims in the ETs which means that it can take several years to get a hearing, and the compensation available will often be less than the cost of bringing a claim. Unless the enforcement issue is addressed, newly enacted employment rights will not make much difference in the workplace.
Impact on businesses
Firms benefit from a level playing field
15. Labour laws generally set ‘basic’ standards which all firms are expected to observe: a ‘level playing field’. Firms which do not observe such standards, for example by paying below the minimum wage or employing people for longer than the maximum working week, can thereby obtain an artificial competitive advantage. If other firms follow their lead, through a fear of being undercut, there will be a ‘race to the bottom’ in standards, which ultimately harms everyone, firms and workers alike. A level playing field is ultimately in everyone’s interests.
16. In principle, the best way to agree common labour standards for an industry or sector is by collective bargaining. Thus the Bill’s proposals to facilitate the setting of legally enforceable industry-wide terms and conditions in two sectors, adult social care and school support, are crucially important. This is a start, but is not a sufficient response, since there are many other sectors in which multi-employer collective bargaining is weak or ineffective. There is no reason why sectoral collective bargaining cannot in due course be reintroduced across the economy, as it was up to 1980 in this country. This reform would give employers the security of knowing that a level playing field is in operation in their industry and that they will not be undercut on wages and terms and conditions by their competitors.
Countries which are highly competitive globally have not followed the UK’s deregulatory model
17. Even with the return of sectoral bargaining, there would be a need for a legislative floor below collective agreements, to ensure that upward pressure is maintained on the wages and terms and conditions negotiated by employers and trade unions. This model, of a statutory floor underpinning collective bargaining at sector and enterprise level, is normal across the OECD.
18. Countries with interlocking labour standards of this kind include those with highly competitive, export-orientated industrial sectors, such as Germany and Japan. In these countries, firms compete, both domestically and internationally, on the basis of labour and product quality. Between 1980 and 2023, Germany had a cumulative trade balance of +218% and Japan one of +45%. Over the same period, the UK had a cumulative deficit equivalent to -180% of GDP, the worst in the G7 (Koo, 2024).
Economic growth and wealth creation
Productivity and employment effects of labour laws: what is the evidence?
19. There are dozens of studies exploring the question of how labour laws affect productivity and employment. The results vary according to the country and sector concerned. As with all statistical analyses, the results are subject to the choice of model and data, which researchers can reasonably disagree on.
20. With these caveats, the majority of recent studies show that worker-protective labour laws increase employment rather than reducing it (Brancaccio et al., 2020). Some studies report positive effects on productivity, meaning value added per unit of labour input, and innovation, as measured by the registering of research-intensive patents and the take up of robotic technologies (for a review of the state of the art, see Billa et al., 2025).
21. Analysis using the Cambridge Leximetric Database (Adams et al., 2023) reports a positive impact on employment of worker-protective labour laws in the UK. This is an average effect over the past 50 years. The same study reports positive productivity effects for some types of labour laws, although with a delay. This is consistent with stricter labour laws inducing additional training and increased capital investment by firms, but with the positive economic impacts taking some time (1-2 years on average) to be realised (Deakin and Pourkermani, 2024a, 2024b).
22. This research is historical, so it is not a forecast or prediction. There are many factors affecting productivity. Labour law reform can only be one part of a strategy to raise productivity and improve working conditions, and so needs to be understood in the context of other legal and institutional reforms.
Addressing the problem of ‘capital shallowing’
23. The UK is currently affected by the phenomenon of ‘capital shallowing’. In other words, there is relatively little capital investment per unit of labour input, compared to other countries. This implies that labour is relatively undervalued in the UK, compared to capital. Conversely, the cost of working capital, for use in the productive sector, is relatively high in the UK.
24. The cost of capital is high in the UK because of the way corporate governance rules operate to increase returns to shareholders in listed companies, through dividends and share buybacks (Driver et al., 2020). The tax and regulatory structure governing private equity and private debt work to generate supra-competitive returns to these types of investment, which are crowding out other more productive uses of capital (Appelbaum and Batt, 2014). Tackling the UK’s relatively weak productivity performance will necessitate a consideration of these features of capital markets, alongside analysis of labour laws and labour market institutions.
Ensuring that productivity gains are evenly shared
25. Labour laws can in principle contribute to productivity, by nudging firms to compete on the basis of quality rather than cost alone. They are also essential for ensuring that gains from productivity are equally shared. Around the world, but in particular in the USA and UK, capital has been taking a larger share of profits at the expense of labour since the early 1980s (Deakin, 2021). This trend is associated not just with rising income inequality, but with negative impacts on health, including a rise in child mortality and chronic diseases including obesity (Ferguson et al., 2017).
26. Realigning industrial and labour market policies in order to ensure that wages grow faster than productivity is now a priority in several countries. Real wage growth is on an upwards trend in east Asia, where labour protections have also been strengthening recently. According to the International Labour Organization, ‘the remarkable economic growth of China has been driven by a significant structural transformation, with workers moving from the low-productivity agricultural sector to the higher productivity industrial sector, thereby increasing labour productivity in the overall economy, which ultimately has translated into higher wages’ (ILO, 2024: 16). In Japan, ensuring sustained real wage growth is the stated policy of the current Ishiba government, as it was of the previous Kishida administration (Whittaker and Nakata, 2024).
27. The UK government should make a similar commitment to raising the level of real wages over time. While wages are determined by many factors, a sustained rise in the incomes of working households will not be achieved without an across-the-board modernisation of the UK’s labour laws.
References
Adams, Zoe, Billa, Bhumika, Bishop, Louise, Deakin, Simon and Shroff, Tvisha (2023) CBR Labour Regulation Index (Dataset of 117 Countries, 1970-2022) Codes and Sources, in Simon Deakin, John Armour and Mathias Siems (eds.) Leximetric Datasets [Updated 2023] Apollo - University of Cambridge Repository https://doi.org/10.17863/CAM.9130.2 (Cambridge: Centre for Business Research).
Billa, Bhumika, Bishop, Louise, Deakin, Simon and Pourkermani, Kamelia (2025) ‘The impact of labour laws on the labour share of national income, productivity, unemployment and employment: first results from the 2023 Update of the CBR Labour Regulation Index’ ILO working paper, forthcoming (Geneva: International Labour Office) paper available on request (email s.deakin@cbr.cam.ac.uk).
Brancaccio, Emiliano, De Christofaro, Fabiana, and Giammetti, Raffaele (2020) ‘A meta-analysis on labour market deregulations and employment performance: no consensus around the IMF-OECD consensus’ Review of Political Economy, 32: 1-21.
Appelbaum, Eileen, and Batt, Rosemary (2014) Private Equity at Work: When Wall Street Manages Main Street (New York: Russell Sage Foundation).
Deakin, Simon (2021) ‘Employment and wage policies in a post-neoliberal world’, in Philip Arestis and Malcolm Sawyer (eds.) Economic Policies for a Post-Neoliberal World (London: Palgrave Macmillan).
Deakin, Simon, and Pourkermani, Kamelia (2024a) ‘The economic effects of changes in labour laws: new evidence for the UK’ Digit Policy Brief, April 2024 https://digit-research.org/publication/the- economic-effects-of-changes-in-labour-laws-new-evidence-for-the-uk/.
Deakin, Simon, and Pourkermani, Kamelia (2024b) ‘The effects of labour laws on productivity, employment, unemployment and the labour share of national income: analysis of new evidence from the Cambridge Leximetric Database, with a UK-China comparison’ forthcoming, Global Law Review and CBR working paper series; paper available on request (email s.deakin@cbr.cam.ac.uk).
Dorling, Danny (2023) Shattered Nation: Inequality and the Geography of a Failing State (London: Verso).
Driver, Ciaran, Grosman, Anna, and Scaramozzino, Pasquale (2020) ‘Dividend policy and investor pressure’ Economic Modelling, 89: 559-576.
Ferguson, John, Power, David, Stevenson, Lorna, and Collinson, David (2017) ‘Shareholder protection, income inequality and social health: a proposed research agenda’ Accounting Forum, 41: 253-265.
ILO (2024) Global Wage Report 2024-25 (Geneva: International Labour Organization).
Koo, Richard (2024) ‘Trump, tariffs and exchange rates: the message of elections in Britain and Japan’ INET blog https://www.ineteconomics.org/perspectives/blog/trump-tariffs-and-exchange-rates-the-message-of-elections-in-the-us-and-japan.
Stansbury, Anna (2024) ‘Incentives to comply with the minimum wage in the United States and the United Kingdom’ ILR Review online https://journals.sagepub.com/doi/10.1177/00197939241299417.
TUC (2024) ‘Falling behind on labour rights’ https://www.tuc.org.uk/research-analysis/reports/falling-behind-labour-rights.
Whittaker, D. Hugh, and Nakata, Yoshifumi (2024) ‘Reforming Japanese capitalism: introduction’ Asia-Pacific Business Review, 30: 421-432.
Bio
Simon Deakin is a professor of law and director of the Centre for Business Research (CBR) at the University of Cambridge (https://www.jbs.cam.ac.uk/centres/business-research-cbr/), and a co-investigator in the ESRC Digital Futures at Work Research Centre (https://digit-research.org/). At Cambridge he teaches courses on labour law and the economics of law. Part of his research is concerned with modelling and estimating the economic effects of labour and corporate laws, using econometrics (time-series and panel data analysis) and computational linguistics (machine learning and natural language processing). He also carries out qualitative research. He has recently completed a series of interviews with venture capital-funds and startups, as part of a study aimed at supporting Ukraine’s post-conflict reconstruction (https://uvca.eu/news/study-of-the-legal-framework-for-venture-capital-investment-in-ukraine).