A labour market that works

This paper looks at the functioning of the UK labour market and how it has been transformed over the last forty years. The focus of this paper is on the functioning of labour market institutions - the way wages are determined, the workings of the benefits system, the replacement ratio of benefits relative to wages, and the contribution that training and human capital formation can have in enabling displaced workers to adjust to changing circumstances. The paper examines the lessons to be drawn from the 1980s and makes a series of practical suggestions to improve them in the present...  [+] Show more

This paper looks at the functioning of the UK labour market and how it has been transformed over the last forty years. The focus of this paper is on the functioning of labour market institutions - the way wages are determined, the workings of the benefits system, the replacement ratio of benefits relative to wages, and the contribution that training and human capital formation can have in enabling displaced workers to adjust to changing circumstances. The paper examines the lessons to be drawn from the 1980s and makes a series of practical suggestions to improve them in the present context. Since the 1970s and 1980s, the UK labour market has gone from one of the most rigid - a key reason for the multi-million unemployment during the period - to one of the most flexible and adaptable in Europe. Yet as the full extent of the economic damage caused by the coronavirus pandemic comes into view, it will be crucial the government remains open to experimentation.

Key points include: (1) the evidence on the effectiveness of government-sponsored training and retraining programmes is mixed and suggests that their benefits, if any, can take up to four years to appear, and as many as ten before benefits exceed upfront costs; (2) the national system of government agencies providing careers counselling and advice, especially to school leavers, is not an effective substitute of localised, local authority-run school careers service; and (3) the government should consider a new 2020 Enterprise Allowance, which would come with business mentoring, workshops and access to Start-Up Loans, open to anyone not currently employed with a viable business idea and access to start-up capital.

Edited excerpts from publication.