The limits to legislation


When it comes to fixing the economy, could the collective efforts of business and other interested parties be a better solution than passing new laws?

In any economic debate over the free market versus the state, there is usually an acceptance that government needs to intervene. As every economics student knows, the free market, if left unchecked, makes little if any allowance for public goods. But the degree to which governments should intervene is always hotly debated, and as a small business owner I have seen at first hand the result of constant intervention: massive collateral damage.

A good example of this is the 50% income tax rate, imposed in the UK by a Labour government but continued by the current Conservative-Liberal coalition. In the 2012 budget it was announced that this would be scaled back to 45% from April 2013, which sounds encouraging until you realise that for those at the margin, earning between £100,000 and £150,000 a year, the loss of personal allowances means that the effective tax rate is far higher than 45%, or even 50%. In my own business, if I want to give myself, or my most senior employees, an extra £100, it will cost the business nearly £300. In my case this has directly resulted in my placing a limit on my working hours and suggesting to my semi-retired husband that he work more, as his tax rate is lower. That works for our household, but not for the UK–I run a business that, if I work harder, expands and creates jobs. He simply spends a few more hours a week coaching cricket.

There is no doubt that much needs to be done to get the OECD economies back on their feet, but additional government legislation on things like executive pay, or women in boardrooms, both of which loom large in the UK, just as in many other countries, is not the answer. Both these issues need addressing, but by the collective effort of interested parties, rather than legislation. In the case of executive pay, existing shareholder rights, and current employee representation on pension fund boards, should be used much more effectively than they are. And quotas for women on boards will simply lead to tokenism, which will do nothing for the advancement of women in the workplace. As a steering committee member of the 30% Club, a UK-based advocacy group that seeks to recruit chairmen to make a public commitment to a target for their boards, I have seen our efforts, and those of the government-initiated Davies Committee, which published an independent review entitled “Women on Boards” in 2011, lead to a rapid rise in the rate of female appointments, without the need for legislation. I think other countries would manage just as well without legislation, but they would need a similar “collective effort of interested parties”.

Legislation on either count might win approving headlines in tabloid newspapers, but it will not do anything to encourage sustainable economic growth, which is the only thing that matters right now. Until growth returns, people will see their real incomes shrinking and unemployment will remain terrifyingly high. In the UK, for instance, the Office for National Statistics said in March 2012 that the unemployment rate was 8.4% of the economically active population, the highest figure since 1995.

But the more shocking statistic is youth unemployment. In the three months to January 2012, there were 1.44 million unemployed 16 to 24-year-olds in the UK, an unemployment rate for them of 22.5%. Of these, 311,000 were in full time education but were looking for work to help pay for it. So that leaves 731,000 unemployed 16 to 24-year-olds not in education, which is not only a waste, but a time bomb.

If this continues, the UK is going to face a huge competition problem in about five to ten years’ time. The young people of, say, China, will be better educated and will have proven skills and experience. Competition for international investment, already challenging, will become even tougher if we have a whole generation of poorly skilled workers. And the UK is not alone. OECD countries ranging from Spain and France to the US, and non-OECD countries such as South Africa, will suffer just as much.

But even on this issue I would question the need for additional government intervention, and argue for more corporate engagement. My own business, an executive search firm with a 30-year history, knew by 2004 that we would face a talent shortage in about ten years’ time, especially among ethnic minorities who are much in demand from those of our clients based in the UK. Instead of turning to the government to solve the problem, we used a proportion of our profits to develop and fund a 10-week paid training programme for graduates from ethnic backgrounds. This programme is designed to give recent graduates employability skills, and also to expose them to a wide range of workplaces, opening their minds to possible jobs and helping them to secure those jobs.

We have a pleasingly high success rate and have increased the numbers on the programme each year, with the help and support of many of our clients. This award-winning programme, which I am proud to say was originated and developed without any government help, was cited by the World Economic Forum in January 2012 as an example of best practice in talent mobility. There is also the work of Career Academies UK (CAUK), a charity that I chair, which works to raise the aspirations of 16 to 19-year-olds through the provision of supplementary teaching, mentors and paid work experience. Founded in the UK ten years ago, and based on a successful model in the US, it has never qualified for more than a tiny amount of government support, and has been funded almost exclusively by the money and time of 1,000 different employers of all sizes. In comparison, the UK government’s apprentice schemes are a minefield of red tape and take ages to set up.

In summary, legislation is too often seen as the answer. But government intervention, such as the US administration’s worthy but misguided wish to see every American a homeowner, can lead to massive collateral damage, as any shareholder or counterparty of a major financial institution will tell you. In the pursuit of growth, before rushing to put things on the statute book, consult business owners and employers and see if there isn’t a better way.

McGregor, Heather (2012), Mrs Moneypenny’s Careers Advice for Ambitious Women, Penguin, London.

See also: 

Davies Committee (2011), Women on Board

©OECD Observer No 290-291, Q1-Q2 2012

Economic data

GDP growth: +0.6% Q1 2019 year-on-year
Consumer price inflation: 2.3% May 2019 annual
Trade: +0.4% exp, -1.2% imp, Q1 2019
Unemployment: 5.2% July 2019
Last update: 8 July 2019

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