By Max Clarke

Dr John Philpott, Chief Economic Adviser at the Chartered Institute of Personnel and Development (CIPD) comments as follows on the economic and labour market issues surrounding the summit of 19 leading UK employers hosted by the Prime Minister at Downing Street today:

“The CIPD greatly welcomes today’s jobs summit as evidence of the Coalition Government’s commitment to switch the focus of policy attention away from spending cuts and tax increases and toward economic growth and job creation. However, it is equally important that public policy debate on these issues is grounded in a proper economic assessment of the determinants of growth and employment.

“Policy makers should always distinguish between the economy’s job creation potential — which is determined by the functioning of the supply side of the economy - and the actual rate of job creation experienced at any particular time, which is primarily determined by the demand for labour.

“It is widely agreed that the UK’s flexible labour market has a relatively high degree of job creation potential by international standards, a reputation further enhanced by the rapid rate of private sector job creation witnessed in 2010 as the economy enjoyed a much stronger than expected recovery. However, although policy initiatives and business pledges to further enhance job creation potential — including those discussed at the Prime Minister’s jobs summit — are welcome they are likely to have only a marginal impact on the employment outlook in 2011.

“The fall in UK private sector employment during the recession was purely the consequence of inadequate demand resulting from the global financial crisis rather than due to some underlying problem in the functioning of the labour market. The critical determinant of private sector employment growth in 2011 will in turn be the extent to which net exports and investment offset slower consumer spending and the planned cuts in public spending and tax hikes.

“In this context it would be particularly inadvisable for the government to introduce a so-called ‘employers’ charter’ enabling employers to dismiss workers within two years of being hired rather than one year at present. Such a move would do nothing for jobs in the short-run against a backdrop of weak economic growth and would at best have only a limited impact on the economy’s underlying job creation potential.

“Evidence on the effects of employment protection legislation is equivocal but on balance suggests that while less protection encourages increased hiring during economic recoveries it also results in increased firing during downturns. The overall effect is thus simply to make employment less stable over the economic cycle. It is arguable that had a policy akin to the ‘employers’ charter’ been in place during the recent recession there would have been more redundancies in a manner akin to what occurred in the 1990s recession. Such an outcome would have been detrimental to fostering a culture of genuine engagement and trust between employers and their staff, and potentially harmful to the long-run performance of UK plc.”