Last October, the UK Chancellor George Osborne announced a new scheme to allow employees to trade employment rights for shares in their company. The idea is that, in exchange for signing away their rights to unfair dismissal, redundancy pay, and (the right to request) flexible working hours, employees would get a few thousand pounds worth of shares, which could be sold tax-free.
The scheme is due to come into action this year – the original announcement suggested that it would be as early as next month, though I’m not sure if that’s still true. The exchange would be voluntary for existing employees, but businesses are allowed to offer only this type of contract to new hires.
The rationale for implementing this change is fairly transparently to further the Tory goal of labour market deregulation. They think that businesses aren’t hiring people because they’re worried they won’t easily be able to fire them again if they turn out to be rubbish. As opposed to, you know, because the lack of consumer demand is dissolving their revenue. Last year’s suggestion in the Beecroft report that companies should just be able to fire people willy-nilly didn’t go down that well, so this seems to be an attempt to get to the same place in a more palatable way. Rather than “We should be able to fire you whenever and for whatever reason we want”, it’s “Why don’t you exchange your employment rights for ‘Ownership rights’?”.
On the face of if this might not be too terrible. It’s a free choice – existing employees can keep their rights if they want to, and employers offering the ‘no rights’ contract might scare off potential applicants. However, leaving aside the fact that most people will take just about any job they can get right now, this rosy picture still leaves out an important way in which human beings tend not to behave with perfect economic rationality.
In his book Choosing the Right Pond, the economist Robert Frank gives a good example of this. Imagine a mining company which allows people to work in unsafe conditions for higher pay. In the world of traditional economics, this is a rational market. People that value their safety highly (those with children, for example) will stay in the lower paid, safer conditions, whereas the more adventurous, money hungry types will trade away their safety for more cash. It’s an optimal outcome because everyone gets what they want. The problem, as Frank points out, is that people fundamentally don’t think about money and safety in the same way. Money (or what it can buy) is both visible and relevant for your social prestige. Safety is neither of these things. For this reason, it doesn’t just matter how much money you have in absolute terms, it matters how much you have relative to other people. This means that the ‘rational market’ for safety breaks down. If one person opts for the riskier, more lucrative conditions, they don’t just enrich themselves, they make everyone else feel relatively poorer. In order to regain their previous status, the others have to opt for the riskier conditions too. In the end, no-one has gained any ground status-wise, but they have all sacrificed their safety. Just like an arms race between countries, where billions are spent maintaining parity, everyone would have been better off if they could have just agreed beforehand that no-one would accept the riskier conditions. Luckily, we live in a country with health and safety laws that prevent this kind of thing from happening (though more on this another time…).
The parallels between Frank’s example and the shares-for-rights plan are obvious. If the scheme ends up being attractive to employers (although there are encouraging signs that it won’t be), we could end up seeing these little ‘arms races’ enacted in companies all over the country.
If there’s a take-home message from this it’s that, when crafting legislation which ostensibly allows ‘free choice’ and ‘flexibility’, we really need to go beyond the traditional economic picture and think about how people’s positional concerns are likely to affect their behaviour.