The coming collapse in the jobs market

If you are a mother juggling the demands of raising a family while trading commodities for a hedge fund, and you also happen to be hacked off with your employer, then 2026 could turn into a very good year. The Employment Rights Bill currently making its way through Parliament, is about to award you lots of extra rights. There is just one catch. It will also make firms very reluctant to hire anyone – crushing the economy at a moment when it is already stagnating.

The Bill, being driven through by junior minister Kate Dearden, is likely to turn into one of the most significant reforms of a Labour government that, in most respects, has done very little apart from putting up taxes to spend more on welfare. We already had a good idea that it was likely to be very damaging. But as the small print has started to emerge as it makes its way through Parliament, it is turning out to be far worse than anyone had feared.

Take salary caps, for example. Right now, the law limits the amount a tribunal can award to £118,223, or one year’s salary. After negotiations with unions, that will now be scrapped, allowing potentially unlimited claims against firms. It is not hard to see how that is going to end up.

A star trader in the City, or an exceptionally well-paid CEO, might be making £1 million or more a year, and they will now be able to sue for several times that amount if they feel they have been discriminated against, or unfairly dismissed. It will create huge incentives to game the system, simply because anyone on those kinds of earnings will be able to hire the best lawyers to make a claim, and might well make themselves several million by doing so.

The cap was designed to ensure the tribunal system was mainly there to protect low-paid workers from exploitation, but now it will be used just as frequently to secure vast payouts for the highest paid.

Or take working mothers. The Bill will make it impossible to dismiss women who are pregnant, on maternity leave, or for six months after they return to work. Persistent lateness, poor performance, or a bad attitude won’t count, and even a conflict of interest, such as shares in a rival company, might in some cases not be enough. In effect, they will become almost a specially protected class, against whom very limited action can be taken. Given that there are around six million working mothers in the UK, that is no joke.

And this comes on top of all the extra rights that were already in the first draft of the legislation. Employees will have the automatic right to ask for flexible working from day one, instead of in exceptional circumstances, and if courts beef up that right, as they almost certainly will, then it will essentially be up to staff to decide when and where to work.

Zero-hours contracts will face lots of fresh restrictions. Statutory sick pay will be available from the first day someone reports as feeling unwell. Parental leave will be mandatory from day one in a new job instead of kicking in after an agreed term. Anyone with more than 250 staff will have to produce an annual “gender equality plan”. The list goes on and on.

Impact of the Employment Rights Bill

That is going to be a disaster for the labour market. Staff should, of course, be well-treated and protected. But that is best achieved through a strong economy that generates lots of jobs so that people can pick and choose whom they work for, instead of smothering the market in so much red tape that no one wants to employ anyone in the first place.

The tribunal system is already clogged up, with the latest Ministry of Justice figures showing the number of claims in the pipeline has reached an all-time high of more than half a million. An extra 330 pages of legislation is only going to add to that number.

Only this week, the unemployment rate rose to 5.1%, its highest level in five years, and millions more people have effectively withdrawn from the labour market and are living on sickness benefits instead. The number of job vacancies fell for the second month in a row in November and has now reached its lowest level since 2025. For new graduates, the market has rarely been so weak.

With the rise in national insurance, it was already a lot more expensive to hire in the UK. Soon it will be impossible to get rid of them if they don’t work out. Once the Bill becomes law, expect a full-scale collapse in hiring. Very soon, it will not be financially viable to employ anyone in the UK.

This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.