When New Work Rules Create New Incentives

Proposed UK labor legislation reminded me of France’s 50 worker rule.

In France, hiring worker number 50 meant your business had to create worker councils, establish profit sharing, and report to employee representatives when firing people for economic reasons. Now, in addition, for companies with 11-49 employees, sharing “exceptional” profits is the rule.

Graphically, you can see total factor productivity (TFP) pop just before France’s 50 employee threshold. One economist explained that knowing what will happen to your business at 50 influences your behavior just before that employee total. It incentivizes behavior that might have waited for a larger enterprise:

New UK Labor Legislation

Introduced to Parliament on October 10, 2024, the UK Employment Rights Bill would guarantee sick pay and parental leave much sooner during a worker’s tenure than previously mandated. According to the law, those employees that had to wait two years for eligibility, now, after a nine month probation period, would get the benefits. Instead of having to wait for months or a year of being on the job, workers would get bereavement, parental, and paternity leave after day one. Also, employees, unsure of when they do and don’t work, would get a “guaranteed hours contract.”

There is more but you get the picture. The UK is changing what employees can expect from their employers.

Commenting on how the new law would impact his business, one employer said he would be more “cautious of who he takes on.”

Our Bottom Line: Unintended Consequences

The following cartoon shows my favorite regulatory unintended consequence. From a satirical magazine, it illustrates the impact of quotas in the former Soviet Union. Yes, it makes sense that a factory manager will target quotas to get a salary and bonus. Then though the unexpected kicks in. The image displayed the impact of a weight quota in a nail factory:

When regulations ripple through an economy, they can have unintended consequences. If workers are entitled to the equivalent of a job guarantee through a detailed firing process, then getting hired is more difficult. In France, one consequence was the proliferation of smaller enterprises. For the UK, we don’t know the unintended consequences, but we can be sure there would be some.

My sources and more: Although dated (2016), the facts on France are timeless. A possible complement, the UK labor legislation from October 10, 2024 is detailed here, here and here.

Our featured image of the Palace of Westminster is from Wikipedia.