In this essay I am going to look at the present labour-market policies in Britain and their relative decline or increase over the past 17 years during which the UK has moved towards an open society and changed its line of policy. The fact that the policy still exists, together with the imperfections arising from moving costs and language barriers in different countries, implies that the government still has a definite role to play, and will always have, at least until everyone is speaking English or the transport costs become negligible.
Main line of government policy after conservatives came to power in 1979 have been to make labour markets more flexible and withdraw the state intervention (deregulating the markets), that was thought to only promote inflexibility. Intervention was only allowed when it was aimed to make market more competitive and free. There is a paradox here as the state is interfering to ultimately reduce its share. But the state intervention was only thought to be short-term and in long-term markets could survive on their own.
The main areas of this interventions were the special employment measures and training promotion. It was thought that the training have positive externalities for the whole community (GDP and international competitiveness rises, less burden on taxpayer) and the people involved do not realise that. It was also cheaper to put people on state work where they actually did something than to just pay them unemployment benefits.
The idea why government started to carry out these policies was because of the increased international competitiveness arising from the formation of EU (where the trade barriers were abolished and the movement of labour is unrestricted) and the increase in output of low-wage economies. In order for the Britain to survive and produce what it has a comparative advantage in it must restructure its economy. It is not possible to keep the goods coming from low-wage economies behind high trade barriers forever.
Now it is impossible for the government to decide what are the products that the UK has a comparative advantage in producing. Before the state could direct the economy to produce goods that were in shortage in UK, now the goods can be imported with almost no extra cost. So the only thing the government invention can do is to enable the markets adopt better to the international competition - to make them more flexible.
Fiscal measures, especially the supply side policies are the name of these much favoured processes. First main improvement was the cut in income tax from 33% to 25% (top rates were cut even further) and the increase in indirect taxation. This arguably favours the inventive entrepreneurs to adopt to more profitable areas of production and thus make them work harder. On the same lines the poverty trap was reduced (i.e. people do not loose so many benefits when they start working, thus marginal income from working is higher). Benefits were linked to prices not earnings in order to reduce their share of GDP. This policy means that the government can reduce its share in the economy gradually. Savings were also encouraged through tax relieves in order to provide funds for new investment. Minimum wage has also been abolished and the EU social Chapter was not accepted in the UK.
Financial services have also been encouraged. Although they draw labour away from manufacture and the manufacture being major part of the GDP in England, it is argued that Asian and other developing countries have a comparative advantage over England in manufacture, but Britain can do better in tertiary sector.
Next major policy area have been the trade unions. It is argued that they reduce the flexibility in markets and thus discourage the transition of the economy that could produce more profits to all in the long-run, but will leave some unemployed in the short run. Legislation on trade unions have been tightened. Secondary picketing is not allowed and a secret ballot must precede strikes. This policy has also managed to cut the number of working days lost due to strikes which is also beneficial to the economy (less is wasted). Wage bargaining is now carried out on a firm level. This has the advantage of localising problems and not many working days are lost due to industrial disputes. Also firms are more sympathetic to negotiations when a secret ballot is successful. However it has been argued that there are benefits to be gained from both Industrial and firm level bargaining, UK is somewhere in between and can loose the benefits altogether. There could be an international bargaining structure soon appearing and nation governments will be powerless in that case.
Some have also argued that the state should guarantee acceptable working conditions through intervention. Minimum wage could actually improve employment as the nutrition standards of people will improve and the marginal costs of hiring extra labour will vanish. There must be however a coherent policy in that respect in the EU or maybe later in the whole world as otherwise labour will move to countries with benefits and capital to places without and imperfections would be created. State should also keep its role in regulating the externalities and actions harmful to the society. Here again the policy must be more uniform between countries as they globalise.
I think ultimately the local governments may not have to regulate the labour markets as the countries will have established the production methods most suitable for them and the markets have trained to be flexible. However right now the economies are definitely not "Global" enough for that to happen. I think English government has taken a right course in trying to help the markets to reach this equilibrium. If all governments would follow the same strategy then ultimately the national governments could delegate their powers to a global government. However before that the cultural and language barriers must be overcome. This could take a very long time and it could be wise for the national governments meanwhile to sacrifice home flexibility to better working conditions in their home country.