A new paper published by the Institute of Economic Affairs (IEA) argues that rapidly increasing regulation of the labour market since the 2008 financial crisis is a key part of the explanation for Britain's poor productivity performance. Professor Len Shackleton shows how successive governments have piled new rules onto employers through legislation, tribunal judgments, occupational licensing and informal pressures such as EDI reporting requirements.

The minimum wage now determines pay for far more workers than intended. By April 2025, 2.02 million were paid at the minimum wage rate. Major employers such as Tesco, Sainsbury's and Lidl routinely set pay just above the floor and move in lockstep with government increases. In 2024, 6.07 million workers were paid within £1 of the minimum wage. In Wigan, the National Living Wage now exceeds 80% of the local median wage, compressing pay differentials and making it harder to recruit first-line managers.

Some 22% of the workforce are believed to work in a licensed profession, up from 13-14% fifteen years ago. Roles from social workers to security guards to CCTV operators now require some form of certification, raising barriers to entry.

The paper warns that the Employment Rights Act, which came into law at the end of 2025, will make matters worse. Cutting the qualifying period for unfair dismissal from two years to six months will discourage employers from taking risks on new hires and entrench the "labour hoarding" seen by some commentators as a factor in low UK productivity. HR employment has already grown 28% between 2011 and 2019, as businesses hired more people in an effort to navigate the ever-thickening rulebook.

Meanwhile, the tax system is discouraging work at both ends of the income scale. The £100,000 income tax trap pushes the effective marginal rate to 62% (higher still for student loan repayers), yet the threshold has not been uprated once since it was introduced. At the bottom end, around two thirds of previously unemployed workers face a participation tax rate of more than 50% when they enter work.

This briefing is part of a series published by the IEA on Britain's 'Great Stagnation', diagnosing Britain's growth problem. The next briefings in the series will be published in the coming weeks and will be compiled into a full book published in September.

Britain's poor productivity record since the financial crisis reflects a steady accumulation of interference in the labour market, from employment regulation and licensing to tax, benefits, housing and higher education policy, all of which have made it harder for workers to move into the jobs where they'd be most productive. Add to that an HR culture that gold-plates every new rule out of fear of litigation, and it's little wonder businesses struggle to adapt. If we want to fix Britain's growth problem, we need to start clearing away the clutter that stops the labour market functioning as it should.

Lord Hannan, Director General of the Institute of Economic Affairs, said:
"There is a peculiarly British habit of trying to legislate our way out of every economic problem, so a decade of disappointing growth has produced not a rethink but another layer of rules, each plausible alone and ruinous in aggregate. Employers now spend more time managing compliance than customers, and workers find the ladder they once climbed has been regulated away beneath them."