Building a more dynamic labour market
Adapting an American approach would raise wages and economic growth
The Resolution Foundation recently held an event looking at why productivity is so much higher in the US than in the UK and the rest of Europe. You can listen to the event here. Both my former HM Treasury boss, Clare Lombardelli, and Harvard Professor Jason Furman emphasised that the US is a more dynamic economy.
Today I want to suggest that we (almost) copy one aspect of US dynamism. Unlike most “dynamism ideas”, this policy recommendation will directly improve the position of workers in the labour market.
A CEO I know recently appointed someone to a reasonably senior job. As is usual with such appointments, the person already had a job, and - as is common in the UK - they had a three month notice period.
My friend told me - and a bit of research proved him right - that in the US notice periods are typically two weeks. There is no legal requirement, but that is the convention. To tie people in for longer is considered unreasonable on the part of the employer.
Shorter notice periods have one direct and two indirect benefits to the economy. Most people get a pay rise when they move jobs. Getting that pay rise 11 weeks earlier is a direct rise in the individual’s income. It is also a rise in GDP. Finally, tax revenues would rise. Three wins for the economy!
The most important effect is indirect. If notice periods are short, a dynamic company can scale up more quickly and easily than is currently possible. They can go out and bid for contracts, knowing they can get the staff in time to honour that contract. If an entrepreneur has a good idea, they can make it happen. If demand rises for one firm, they can respond more easily. Making it easier for dynamic firms to grow quickly is definitely good news for the economy.
Finally, knowing employees can leave more quickly would give firms an incentive to think more about their employees. If their leaving is a bigger nuisance, firms will want them to want to stay. The firm will therefore have an incentive to think more about pay rises, promotions, new training opportunities and other things that make the person feel that this is a job worth having.
In contrast, allowing firms to set long notice periods helps incumbents, particularly those firms that are not seeking to grow, and who do not want to respond to growth opportunities. That is not a productivity enhancing strategy - quite the reverse.
We therefore need to change. Now saying “UK businesses should have a different convention” is not a good policy recommendation. It is very hard to change conventions. Nor do I think it would be sensible to ban longer notice periods. School pupils, for example, benefit from teachers leaving at the end of terms, rather than mid-term.
My proposal is that if the previous employer will not let the employee go after two weeks, they must match their new salary for the remainder of the notice period.
If the new job pays much the same wage, the existing employer will not be much out of pocket if they choose to exercise that option. That is fine - from the point of view of the economy, both jobs probably have similar productivity levels, so it is not very important which job the person does for a few weeks. But if the new job is materially better for the employee, with a significantly higher salary, then the new employer really is helping the economy by offering them this new role. It almost certainly is a better use of their skills, and has higher productivity. If the old employer wants to keep them in those circumstances, they will need to pay a substantial sum to do so. At least some firms will let them go - and that would be a thoroughly good thing.
Not clear from the article but are you suggesting an asymmetric policy in which employees can leave with two weeks' notice but employers still have to give 3 months to let someone go? Cutting notice periods to two weeks on both sides would lead to an American hire and fire culture than I believe makes people more anxious and stressed out in general in the US.
Personally, I think all our issues with productivity lie in the structure of our tax system which discourages work at certain thresholds and makes it difficult to start and run a business because it becomes too bureaucratic too quickly - I ran a small business for 5+ years and realised having a regular job is far easier and went back to work.
Very nice, Tim.
It raises a related question for me, about Furlough. Has anyone done an evaluation of whether the strong US recovery from Covid might have come, in part, from having done a large-scale "re-matching" exercise in the labour market. I think you came up with furlough because of Germany's post 2008 experience compared to ours ... but could it be that the benefit or not of "shaking up the matchings" in the labour market depend on the type of shock. Once we had vaccines, the demand rebound was very fast. Indeed, it caused inflation. If people had been paid directly by government, and had spent lockdowns working out what their rematch options were, might we have been better off?