If it costs £34,670 to fire someone then fewer people will get hired

A couple of decades back it was a standard observation about European labour markets that easy to fire made for easy to hire, hard to fire, few hires. The other axis was about what happened to the people fired - substantial welfare support and retraining or not. We could thus carve up the European labour market, the north - especially the Nordics - were easy to fire with substantial support. The Latins were very hard to fire and support was variable. The UK - as so often - was different in that we had easy fire and very little support.

The observation of those different markets was that the easy hire/fire markets have lower unemployment rates and, as ever with any stickiness in labour markets, this burden fell most heavily upon the young and untrained/untested. Youth unemployment rates in the Latins were terrible, mulitple tens of percents simply unable to get a job as a result of the costs of trying to reverse a mistake if one were made.

It was also pointed out that it’s possible to think that UK solution was not optimal. But if that were so then more effort should be made on the support/retraining rather than making the firing harder, more expensive.

Hmm:

Other documents showed Mandelson demanded £547,000 as compensation for his sacking as UK envoy to the US last September — his salary over his full contractual term.

He ultimately received severance pay of about £75,000, consisting of £34,670 of discretionary payments on his departure, on top of the £40,329 to which he was legally entitled.

Given the circumstances here why was anything over those legal entitlements paid (we’re fine with contracts stating payoffs, contracts are contracts after all. Especially if someone has just moved countries to do the job, seems fair to us)?

Now yes, we know Andrew Griffith is a politician making hay but still:

The award of £75,000 was less than the cost of employment tribunal fees, which led the government to “reluctantly agree”.

And, well, we are always going to hire someone or other to be Ambassador to Washington so these costs are not going to impact upon that decision. But in a more general sense across the economy what is the effect going to be on the hiring of the young and untrained of these sorts of employment tribunal costs of a firing, even for cause?

The reason the UK youth unemployment rate is rising up above the EU average and moving toward that of the Latins is?

Well, yes, as the conventional wisdom has had it for decades that’s the wrong way to reform the UK labour market, isn’t it?

Tim Worstall