John Oxley: Labour seem determined to drive up unemployment, again

John Oxley is a consultant, writer, and broadcaster. His SubStack is Joxley Writes.

It is a fact ingrained in every Tory activist’s memory: every Labour government has left unemployment worse than they found it.

The observance serves as an easy shorthand for the threat of Labour economic mismanagement and the second-order effects of tax rises and interventions in the Labour market. Barely nine months into this new period of power, Starmer and Reeves seem determined to make it happen again, actively leaning into political choices that will make it less attractive to hire people and, therefore, harder to get a job.

First came the National Insurance hike.

With a pledge not to raise taxes on ordinary people, the Chancellor made businesses pay the price, increasing both the rate of tax and the level where it kicks in. Now, Labour is pushing forward with a plan to “beef up” employment rights, with expansions of parental leave, sick pay and protection from unfair dismissal.

These plans may be popular with voters, but the consequences may not be.

Each of these plans increases the costs of hiring people. Some of these moves bring explicit expenses, while others bring greater administrative burdens, especially around hiring and firing. For small and medium businesses especially, these can be the difference between a hire being economical and unaffordable. The plans fail to contend with the reality of the decisions employers have to make – if it is too costly and burdensome to take someone on, you simply won’t. They threaten to push us towards a more European model, where benefits are good for those in secure work, but jobs themselves are harder to find.

Labour perhaps has reasons for embracing this.

Since the financial crisis, employment rates in the UK have stayed surprisingly high. The cost has been borne elsewhere, however, in productivity and wage growth. Controlling unemployment was perhaps one of the great economic (and political successes) of the 14 years in power. It responded more quickly after 2008 than in previous recessions, and even after COVID, there were record numbers of job vacancies and people in work. While other European nations saw unemployment, especially among the young, surge, we avoided that fate.

It was a double-edged achievement, however.

A little tolerance for unemployment can be a good thing. If hiring people is hard, it encourages workers to be sorted towards more productive roles. Employers are encouraged to invest in equipment rather than adding in extra, cheap labour. In many sectors in Britain, we have become reliant on the latter, fuelled by rising immigration. A break on cheap jobs could help kick Britain out of this low productivity cycle.

It might also help the government deal with that other threat – inflation.

Increased costs for businesses can slow down wage growth, while unemployment typically leads towards less consumer spending. The government is still struggling with high food inflation and is further pressured by the impact of Trump’s tariffs, so this could be a welcome lever. It is, however, a risky one. There remains a real chance the economy may slip into recession, with further job losses and even more unemployment. This will be politically and economically disastrous.

The noticeable thing about Labours track is that they are raising both the costs and hassle of hiring people. This suggests one of two things. Either it is a deliberate choice to go all-in on risking unemployment or, more likely, a strategic incoherence. The Treasury wants to raise funds and so sees employers NI as a good way to do it. The party also wants to improve workers’ rights. It doesn’t see how these go together when employed. They are missing the impact it could have on growth.

Raising the cost of employment alone could help shift people into more productive jobs. The increased employment rights, however, act as a break on this. To absorb the people pushed into unemployment by the NI rises, you want to encourage new businesses and new ventures to take a punt on hiring. Making it harder to shed workers does the opposite. Businesses generally don’t want to get rid of people but do want to have the flexibility to expand and contract their workforce. Adding extra burdens to the employment relationship will be a drag on good employees, perhaps even more so than it is a discouragement to bad ones. If rapidly growing firms are thinking twice about taking people on, the entire economy suffers.

For a government looking for growth, they risk swinging too far and stifling the labour market. These measures could bring the (perhaps necessary) destruction to jobs at the margin, but without the creativity to replace them. That, in turn, would damage our economic prospects and push more people out of work and into the benefits system, crashing against Labour plans to get welfare spending down.

A stuck jobs market could be the worst of all for labour. It will push up spending and hinder growth. More than that, it will drive the sort of spike in worklessness that governments usually work hard to avoid. High unemployment is obviously politically toxic and spirals into declining towns and worsening societal conditions. The Tory government of the last 14 years knew that high employment had impacts on productivity and wages but also understood this was easier to weather than people out of work.

The government is choosing to make Britain a more costly place to employ people. They hope it will work out for the best, pushing Britons into more productive, higher-yielding roles. It is not necessarily the worst idea. After all, Mrs Thatcher began her time in office allowing unemployment to rocket in the hope that it would bring better gains later on. Yet pulling on both leavers, driving up the total cost of employment, and with regulations that deter new hiring, it could have the opposite effect.

We have come to expect Labour governments to lead to higher unemployment. Rarely, however, have they launched into it so deliberately. Hiking National Insurance and bulking up workers’ rights are likely to cool the job market. Time will tell whether that will pay off.

There is every chance the Tories can go into the next election repeating their own line about Labour’s jobs record – and finding a willing audience who have been at the sharp end of it.