My previous pieces (here and here) discussed the topic of “Eurosclerosis” — how static European labor markets cause economic stagnation. While unemployment has fallen, European labor markets aren’t dynamic. Many workers stay with the same employer for more than 10 years, thereby sacrificing career growth opportunities and lifetime earnings! It also has a negative effect on labor productivity and economic growth.
Any move towards even more rigid labor markets with excessive employment protection laws, making it super costly for companies to hire and fire workers, is surely a step in the wrong direction. Unfortunately, one of Labour government’s flagship policies — the Employment Rights Bill — proposes sweeping reforms that will do just that!
The Bill is expected to become law this year, but some sections will only come into effect in 2026 and 2027. Increasing worker protections could risk plunging the U.K. labor market into further stagnation.
What laws are being changed and why does it matter?
Among others, the Employment Rights Bill (ERB) is going to make the following changes, affecting the way that companies can hire and fire workers in the U.K.
1. Day-one unfair dismissal rights
What the ERB does: Removes the two-year qualifying period before workers can claim unfair dismissal, making dismissal protections apply from the first day of employment. Why it matters: This change raises the perceived risk of hiring, especially for small firms and low-margin sectors. Employers will become even more hesitant to take on new or untested workers if firing becomes harder or riskier. Hiring and job growth will suffer, especially in a weaker economic environment like the one we are seeing right now.
2. Right to request guaranteed minimum hours & advance notice
What the ERB does: Workers on variable-hour contracts (e.g. zero-hours, agency work) gain new rights to request a guaranteed minimum number of hours, and reasonable notice of shift changes.
Why it matters: These measures limit firms’ ability to adjust labor input flexibly to demand fluctuations, especially in sectors like hospitality, logistics, and retail. This may reduce hiring of flexible workers at the margin, or push firms to automate instead.
For context, the number of workers in the U.K. on zero-hour contracts almost doubled since 2014 and now stands at about 1.2 million.
3. Restrictions on “fire and rehire” practices
What the ERB does: Severely limits employers’ ability to dismiss workers and offer re-employment under new terms — unless a viable business rescue case can be proven.
Why it matters: “Fire and rehire” is controversial and companies that do it often suffer from major reputational risk. But it sometimes might be necessary for firms to do it regardless because they need to adapt to big economic shocks (such as the COVID-19 pandemic). Restricting this practice could make adjustment costs higher, discouraging expansion or long-term hiring.
4. Expanded rights for pregnant workers and returners
What the ERB does: Extends the period of redundancy protection well beyond existing maternity leave. Why it matters: Increased protection will reduce firms’ willingness to hire women of childbearing age — particularly for small firms, which lack internal flexibility or redundancy buffers. It might become harder for younger women to find a job in the first place!
5. Creation of a new enforcement agency (“Fair Work Agency”)
What the ERB does: Introduces a powerful new labor enforcement body to police worker rights across multiple domains (minimum wage, working time, redundancy, etc.)
Why it matters: More regulatory pressure and potential legal exposure for employers. While compliance sounds good in theory, businesses in the U.K. are already being stifled by bureaucracy as it is. Greater bureaucratic oversight will reduce hiring appetite further, particularly in sectors already struggling with paperwork and turnover.
The UK market has a high share of agency workers
Agency work is playing a greater role in the U.K. compared to other European markets. British employers use agency staffing to respond to demand fluctuations quickly, and workers use it as a stepping stone or to bridge employment gaps.
The U.K. agency work sector thrives on flexibility, particularly in:
- Healthcare (NHS trusts rely heavily on agency nurses and locum (substitute) doctors)
- Logistics and warehousing (especially during peak periods like the holidays)
- Hospitality and events
- Manufacturing and construction
The shift towards guaranteed minimum hours and advanced shift notifications, mimicking European-style protections, might backfire by weakening the labor market via the following mechanisms:
- Lower demand for agency workers
- Reduced placements, especially for lower-skilled or entry-level workers
- Higher informality — meaning that the work will happen outside formal, regulated employment like cash-in-hand jobs — if employers seek workarounds
What can we learn from Denmark?
Denmark’s celebrated “Flexicurity” model, spotlighted in this year’s Economics Nobel, offers a compelling alternative to rigid labor markets. Hiring and firing are relatively easy in Denmark. Employers face low dismissal costs and minimal red tape, making it easier to adapt to changing economic conditions.
But this flexibility is balanced by security: workers who lose their jobs are supported by generous unemployment benefits, often replacing up to 80–90% of previous earnings for a limited time (with caps), and lasting up to two years under certain conditions.
Crucially, the Danish model also invests heavily in active labor market policies — including personalized retraining, job-search assistance, and upskilling programs — to help workers transition into new roles. This combination ensures that people are protected, not jobs. This creates a more dynamic labor market without leaving displaced workers behind, benefitting both companies and workers in the long run.
What does that mean for recruiters?
While the intent of the Employment Rights Bill is to upgrade worker rights, it might have the opposite effect for many jobseekers: by raising hiring costs, increasing dismissal risk for employers and limiting flexibility around hours and contracts, the Bill threatens to depress formal employment.
The effect on recruitment is clear. Companies will become more cautious in increasing headcount in a labor market that is already stagnant. The effect will vary by industry. Hospitality, warehousing, logistics, and healthcare are more reliant on agency workers. But the demand for agency workers will decline as the Labour government implements additional hurdles to hire flexible staff.
