Labour market regulation

Government intervene in labour markets to overcome market failure, protect workers health and safety and to reduce inequality. Government labour market regulations include.

  • Maximum working weeks
  • Statutory minimum wages
  • Legislation to prohibit discrimination
  • Protection against unfair dismissal.
  • Health and safety legislation
  • Right to join trade unions
  • Legislation to auto-enroll workers in private pensions
  • Regulations about employing illegal immigrants.

Maximum working week

In the UK, the “Working time directive” prohibits an employee working more than 48 hours a week (averaged over 17 weeks – The aim is to prevent firms exploiting workers by getting them to work long hours. The EU working time directive 2003 is to protect workers health and safety since excess work can be associated with stress, depression and poor health. This is particularly important in jobs like pilots, lorry drivers and boat workers. A maximum working week reduces the risk of fatigue – which could be dangerous with people falling asleep at the wheel.

Also, an argument for a maximum working week is that it would encourage firms to invest in capital to increase labour productivity. If firms can rely on workers doing long hours, there is less incentive to become more efficient.

In the UK, workers in most sectors can opt-out of a 48 hour week, which means the legislation is not so restrictive and if people want to work longer hours they can. Drivers and pilots cannot opt-out.

Another difficulty is that in some jobs, there is no clear measure of hours spent working. For example, teachers may, in theory, do a 35 hour week at school, but then spend several hours in the evening and weekend answering emails, and preparing and marking school work. It can be difficult to strictly enforce a maximum working week when there is a subtle pressure for workers to do extra and not complain.

See: Pros and cons of maximum working week

Minimum wages

This is a legal minimum wage. In the UK the minimum wage for workers over 25 is £8.72. The aim is to increase incomes for the low paid and reduce relative poverty. A minimum wage can also reduce the cost of government benefits as with higher wages, the government need to pay less in top-up benefits to provide families with enough income. With minimum wages, there are different rates for younger workers. The rate for under 18s is £4.55.

The government is responsible for creating a level playing field making sure all firms stick to the legal minimum. If some firms were able to undercut on wages they would have a competitive advantage. A minimum wage means that all firms have to increase wages and in this case, it becomes easier to pass the wages on to consumers in the form of higher prices.

However, with rising minimum wages there becomes a bigger incentive for workers to accept work in the black market, illegally work for lower wages in the informal economy.


Also, some argue a minimum wage may cause unemployment if labour markets are competitive.

See: Pros and cons of raising the minimum wage

Legislation to prohibit discrimination

Discrimination can involve age, sex, race and sexuality. Government legislation prohibits discrimination and states workers have a right to be treated equally without discrimination. For example, if two workers do the same job, they should get the same wage. If a worker feels they have been unfairly treated or discriminated against, they can appeal to employment tribunals.

Some discrimination can be difficult to prove. For example, if a firm is less likely to employ workers from ethnic minorities it is difficult to prove this as discrimination. Also, if a worker is fired or not promoted, it can be difficult to prove this is conclusively due to discrimination and not other factors.

Legislation on discrimination includes

  • In 1970, the UK passed the Equal Pay Act which outlawed paying different wages for the same job on the grounds of sex.
  • The Sex Discrimination Act (1975) sought to promote greater equality of opportunity in training It created the Equal Opportunities Commission (EOC) which enabled people to bring cases of discrimination.
  • The Equality Act 2010 The Equality Act brought together different acts outlawing different types of discrimination – age, sex, disability, religion, sexual orientation.

Further reading: Legislation on discrimination

Health and safety legislation

There is legislation about all aspects of health and safety, which can be specific for a particular industry. All business are required to appoint a competent person and prepare health and safety policies. This includes risk assessment and basic first aid provision. It also includes legislation on fire exits and safety checks.

Health and safety legislation often evolved in response to bad industrial accidents. For example, the Triangle shirtwaist factory fire in Manhattan, New York caused 146 deaths and led to US government passing legislation about fire safety.

Since Covid-19, governments have brought in emergency legislation to combat the spread of the virus by imposing social distancing measures, such as 1.5m distance between people and compulsory hand washing.

Trade unions

Labour market regulations usually cover trade unions. In EU, workers have a right to join a trade union and seek representation through their union. Trade unions can act as a counterpoint to monopsony employers.

See: Trade unions

Advantages of Labour market regulations

Protect health and safety. In a free market, a firm may seek to cut costs by cutting safety standards, putting lives at risk. By having a universal standard of safety it prevents a ‘race to the bottom’ – gaining competitive advantage through cutting safety and costs. Many lives have been saved through health and safety legislation

Counterbalance to Monopsony power of firms. Labour markets are different from product markets, a worker cannot change jobs like buying a different brand of food. Many firms have a degree of monopsony power which can lead to lower wages, longer hours and worse conditions. Minimum wages can increase wages and counter-balance by firms.

Reduce stress and improve quality of life. Firms may seek to maximise profits by exploiting firms. This may lead to higher profit in the short-term, but at the cost of declining living standards and unhappiness. Also, if workers feel protected and have good working conditions then they will be more motivated to stay in work and in the long-term this can increase productivity and economic performance.

Problems of labour market regulations

Higher costs for firms. Legislation on maximum working week and the cost of hiring and firing workers can lead to higher costs and discourage firms from investing and employing workers in the first place. It is argued inflexible labour markets are associated with higher unemployment.

Costs of administration. Labour market regulations are only as effective as how much they can be implemented. If regulations are not fully implemented then there is no level playing field and it will encourage more firms to seek to avoid them. There will be a cost of checking and enforcing these regulations.

Unemployment. It is argued if minimum wages are too high then it can cause unemployment because firms can’t afford to pay the higher wages.


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