Labour’s policies on workers’ rights and mandated workplace benefits

What are Labour’s proposals?

The Labour party has proposed a range of enhancements to employment rights including mandating certain workplace benefits. In this comment, we discuss the economics of these sorts of policies and review the empirical evidence on how they are likely to affect employees and employers.

Labour has proposed a ‘New Deal for Working People’. This includes changes to rules on unfair dismissals, ‘fire and rehire’ regulations, and potentially a higher minimum wage. Some of these plans have been discussed by IFS researchers already (Boileau et al., 2024). Here we focus on the proposals for ‘mandated benefits’ and workplace environment regulations, which include:

• expanding statutory sick pay to the first three days of illness and to those earning less than £123 per week;
• making paternity leave (but not paternity pay) available to fathers from day 1 of a job, rather than after nine months of employment;¹
• other workplace rights such as increased flexitime working opportunities, the ‘right to switch off’ (i.e. restricting requirements to work outside normal working hours) and stronger health and safety regulations in the workplace.

The proposals are for increases in the legal minimum required from employers. Legal minimums are often flat-rate, and therefore low as a percentage of pay for middle (or higher) earners (see Harrop, Reed and Sacares (2023)). That said, many employers already offer more benefits than the legislated minimum. For example, survey evidence in Cominetti et al. (2023) suggests 60% of employees in the UK receive more sick pay than what is legally mandated (with higher earners being much more likely to receive more than the legal minimum than lower earners). This pattern of additional generosity (in absolute terms) to high-earning employees also exists for other benefits including holiday entitlement and paid paternity and maternity leave. 

It should be noted that Labour’s proposed changes to statutory sick pay and paternity leave, at least, are relatively modest in scale. In particular, the effects of making paternity leave available ‘from day 1’ would likely be very small indeed. The proposals for expanding statutory sick pay (SSP) are also fairly small. The latest figures from the Office for National Statistics (2023) suggest 5.7 working days are lost to sickness each year per employee. Many of those will be accounted for by long periods off sick already covered by SSP (and, as noted above, many workers are offered sick pay above the minimum level). However, around 30% of sick days are for minor illnesses which are more likely to last only a few days (and therefore less likely to be covered by sick pay). It is harder to have a good sense of the scale of proposed reforms to workplace rights such as the ‘right to switch off’ and stronger health and safety regulations; the devil is likely to be in the detail. To the extent that many of the changes are likely to be modest, it is fair to say that both the benefits, and the costs, are likely to be small.    

In any case, a gradual approach here, starting small, could be advisable. If the policies do turn out to be small in size, that would enable time to gather evidence on their effects, providing an evidence base for making judgements about any further expansions.

When might these sorts of policies be valuable – or not?

Perhaps the most common mistake in thinking about them is an assumption that they must be ‘good for employees’ and ‘bad for employers’. Neither is guaranteed, however.

A key argument in favour of these sorts of mandates is that, without them, benefit provision by one firm acting alone would disproportionately attract workers who expect to make heavy use of that benefit (Rothschild and Stiglitz, 1976; Summers, 1989). Without government intervention, this could mean that the benefit is underprovided. For example, a generous offer of sick pay might encourage people who are more likely to be sick to apply for jobs with that employer. Similarly, an employer might worry that the costs of a generous paternity offer would be magnified by the fact that it would increase the number of soon-to-be fathers who want to apply. This problem ultimately makes it much more difficult for employers acting alone to offer such benefits, even if workers value them above cost. In such a scenario, mandating certain benefits for all employers can solve the problem. 

What, then, are the potential risks of such a policy?  To attract employees, employers set an overall compensation package: the wage, pension contributions, benefits such as sick pay, and other components of the work environment such as flexible working and workplace safety. Employees might indeed value extra cash (i.e. higher wages) less than an alternative benefit that is equally costly for the employer to provide – i.e. it might be better for them to be remunerated partly through benefits, and not merely wages. But if so, employers would already have a strong interest in providing that benefit, since it would be a cheaper way for them to keep workers happy (since they could cut wages, compensate employees with more benefits and still have money left over). This would explain why many employers already offer more than the current legislated minimums. If employers are not already providing that benefit, it could be a signal that employees value higher wages more. In this case, mandating that (some of) their remuneration comes from the benefit is not good for employees. It would amount to forcing their employers to remunerate them in a way that they like less than the alternative (higher wages). Because demand would fall more than supply would increase, it would also risk lower employment. 

Irrespective of the merits of mandating these benefits, as is clear from the previous discussion, a way for employers to respond would be to reduce wages, at least to some extent. The minimum wage adds complications here, and can potentially provide another rationale for the policy, as well as another risk. In order to protect workers from the effects of employers potentially having significant market power, we have a minimum wage.²  In response to the minimum wage, firms might simply cut back on other non-wage benefits (e.g. Datta, Giupponi and Machin (2020) show that in response to the introduction of the National Living Wage, firms increased their use of zero-hours contracts; Clemens (2021) discusses evidence on many more of these sorts of offsetting effects). If they do this then the purpose of the minimum wage – to protect workers against market power – is undermined, and there is therefore a case for providing a floor on these non-wage benefits too. On the other hand, a firm required to introduce a new benefit cannot offset that through lower hourly wages for minimum wage workers. That raises the risk of reductions in employment (or hours of work offered).³

What does the empirical evidence say?

A range of papers, from the 1990s through to the last few years, have studied the effects of mandating benefits and workplace regulations on wages and employment. These have mostly been in the United States, often focusing on the extent to which employers reduce wages in response. Gruber and Krueger (1991) find that mandating industrial accident payments leads to around 85% of the cost being passed through to employees’ wages. Gruber (1994) studies requirements for employers to provide maternity health insurance, finding that approximately all of the increase in costs is passed on to workers in the form of lower wages for women. Olson (2002) finds that the cost of health insurance is fully passed on to employees, with employees willing to accept a wage cut of 20% for receiving health insurance as part of their pay package. Scarfe, Shaefer and Sulka (2024) study the effects on pay of automatically enrolling employees into pension schemes (which includes mandatory employer pension contributions). They find lower pass-through into wages, though still around 50%. 

Several other papers explore the impacts of various benefit or workplace requirements on wages, but where the cost of provision is unknown. In these, the share of the burden borne by employees versus firms for providing these benefits is unclear, but they reinforce the finding that workers are significantly affected: Ruhm (1998) finds that policies that increase maternity leave entitlements only slightly have little effect on wages, but nine-month entitlements reduce wages by 3–4%; Lee and Taylor (2019) show that (random) safety inspections at US manufacturing plants reduce subsequent fatalities by 45%, but also reduce wages by 2–3%. Gruber (2008), summarising the research, states: ‘The consensus of this literature is that, over the medium to long term, the cost of mandates is fully reflected in wages’.⁴

Given this evidence on other benefits, we would expect that – at least for most employees who earn above the minimum wage – significant, or potentially total, pass-through of the higher costs of employing people to lower wages for employees from these kinds of policies. Of course, given the scale of the proposed policies is fairly small, even full pass-through into wages would imply modest wage changes for those affected. But discussion of their potential effects is something that seems to be largely missing from the debate on these policies. While for some employees – such as those who particularly value paid sick leave or the right to take paternity leave – that trade-off will be welcome, for others it might not be.

It is worth reflecting, however, on a most counter-intuitive point regarding the pass-through to wages, as made by Gruber (2008). High pass-through into lower wages can reflect a good outcome for the policy: it occurs because there is both a reduction in the demand for labour (due to higher costs of employing workers) and an increase in the supply of labour (because employees value these benefits), which combined leads to lower wages and no change in employment. Instead, if employees do not value the mandated benefit, the demand for labour would fall (due to higher costs of employing people) but the supply of labour would not increase (since employees do not value the benefit). In this case, the higher cost of employing people is borne to a greater extent by the employers (decreasing their profits, for example), but it also leads to lower levels of employment as employers demand less labour as a result of the policy. 

Conclusion

Bringing this together, what should we make of Labour’s plans? The first thing to remember is that Labour’s proposed changes to statutory sick pay and paternity leave are relatively modest in scale, so any benefits and costs are likely to be small. Bearing that in mind:

• These sorts of reforms can provide a buttress to the minimum wage by stopping employers reducing non-wage benefits in response to the minimum wage. But they might also slightly increase the risk of job loss for low-paid workers.
• For those paid above the minimum wage – the majority of those who would be affected by Labour’s plans – the case for or against mandating benefits and rights hinges on why they are not being provided.
• If they are not provided because the value placed on them by employees is less than their cost, then requiring their provision is inefficient, risks reducing employment, and typically makes employees and employers worse off.
• Conversely, if they are not provided because employers are wary of attracting employees who are likely to benefit from them (such as those who are more likely to be off sick or to take paternity leave), then mandating their provision can help prevent employers avoiding them. In that case, it can make employers and employees better off.
• Based on the empirical evidence on the impacts of previous reforms of this kind, we would generally expect much, and potentially close to all, of the cost of the benefit to be passed through to lower wages. That can be entirely consistent with such reforms being a good idea, as a rebalancing of compensation to those with high demand for these benefits is presumably part of the intention. But it is important not to over-claim: these policies are not a free lunch for workers.

References

Boileau, B., Farquharson, C., Johnson, P., Miller, H., Stockton, I., Stoye, G., Warner, M. and Waters, T., 2024. Labour Party manifesto: an initial response. IFS Comment,https://ifs.org.uk/articles/labour-party-manifesto-initial-response.

Clemens, J., 2021. How do firms respond to minimum wage increases? Understanding the relevance of non-employment margins. Journal of Economic Perspectives, 35(1), 51–72, https://doi.org/10.1257/jep.35.1.51.

Cominetti, N., McCurdy, C., Thwaites, G. and Vieira-Marques, R., 2023. Low Pay Britain 2023: improving low-paid work through higher minimum standards. Resolution Foundation, https://economy2030.resolutionfoundation.org/wp-content/uploads/2023/04/LPB-2023.pdf. 

Datta, N., Giupponi, G. and Machin, S., 2020. Zero-hours contracts and labour market policy. Economic Policy, 34(99), 369–427, https://doi.org/10.1093/epolic/eiz008. 

Gruber, J., 1994. The incidence of mandated maternity benefits. American Economic Review, 84(3), 622–41, https://www.jstor.org/stable/2118071.

Gruber, J., 2008. Mandated employer provision of employee benefits. In The New Palgrave Dictionary of Economics, Palgrave Macmillan. https://doi.org/10.1057/978-1-349-95121-5_2814-1.

Harrop, A., Reed, H. and Sacares, E., 2023. In time of need: building employment insurance for all. Fabian Policy Report, https://fabians.org.uk/publication/in-time-of-need/.

Lee, J. M. and Taylor, L. O., 2019. Randomized safety inspections and risk exposure on the job: quasi-experimental estimates of the value of a statistical life. American Economic Journal: Economic Policy, 11(4), 350–74, https://doi.org/10.1257/pol.20150024.

Maclean, C., Pichler, S. and Ziebarth, N. R., 2021. Mandated sick pay: coverage, utilization, and welfare effects. ZEW Discussion Paper 21-083, https://ftp.zew.de/pub/zew-docs/dp/dp21083.pdf.

Office for National Statistics, 2023. Sickness absence in the labour market: 2022. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/articles/sicknessabsenceinthelabourmarket/2022.

Olson, C. A., 2002. Do workers accept lower wages in exchange for health benefits? Journal of Labor Economics, 20(S2), S91–114, https://doi.org/10.1086/338675.

Rothschild, M. and Stiglitz, J., 1976. Equilibrium in competitive insurance markets: an essay on the economics of imperfect information. Quarterly Journal of Economics, 90(4), 629–49, https://doi.org/10.2307/1885326.

Ruhm, C., 1998. The economic consequences of parental leave mandates: lessons from Europe. Quarterly Journal of Economics, 113(1), 285–317, https://doi.org/10.1162/003355398555586.

Scarfe, R., Schaefer, D. and Sulka, T., 2024. The incidence of workplace pensions: evidence from the UK’s automatic enrollment mandate. Mimeo.

Summers, L. H., 1989. Some simple economics of mandated benefits. American Economic Review, 79(2), 177–83, https://www.jstor.org/stable/1827753.