Nick Hayns: Cut out the red tape and get us back on track

But what I am talking about is the labyrinthine network of rules and regulations that successive governments have imposed in order to try and protect this nation's employees.

Imagine it. You are running a small business. You are thinking of possibly hiring a new staff member, but haven't yet made up your mind. You think it through...

Firstly, you'll have to pay them the national minimum wage. That'll be the best part of 50 for a regular eight-hour working day – more than you can afford, perhaps, and possibly more than you think the job is worth. And what if, once you've hired them, you realise you've made a mistake?

Well you better do it quickly, as they'll be legally protected within a year and you might find yourself on the receiving end of an unfair dismissal claim. There were 57,000 such claims made last year – almost 220 per standard working day. All involve enormous costs to employers – especially small employers.

However, at least such claims are currently capped – at a very generous 70,000, and regularly increased in line with inflation – discrimination claims are subject to no cap whatsoever. You might think anti-discrimination legislation is there to protect employees of minority groups from abuse or unfair treatment – and most likely that was the intention – but, no, the biggest "race" discrimination award so far seen (some 375,000) was given to an English banker who claimed he had been passed over for promotion at a French bank. Hardly something that would have got Martin Luther King exercised.

In the end, you decide it's not worth it. You are not sure you can afford to pay someone 50 a day for the work you need done and you know an unfair dismissal payout might put you out of business – maybe just the legal fees in defending yourself would. That's one less job created. Your business has not expanded and, in terms of the job market, one more person remains unemployed.

This is just part of the legacy of decades of creeping state interference in the job market – working-time directives, equalities legislation, minimum wage requirements. All serve to act as barriers to growth in the UK economy and, crucially, actually contribute towards higher unemployment.

If you have skills that the market doesn't value at 5.93 an hour, then legally you cannot be offered any work. Back to the dole queue and the Job Centre with you.

So what can be done?

To some degree the Government's hands are tied by EU legislation, but there are some simple measures that could be taken to improve the flexibility of the job market here. The Government has made noises this month about extending the period of time before protection from unfair dismissal kicks in to two years.

A positive move. But elsewhere, a cap could be placed on payouts under discrimination cases, and the cap lowered on unfair dismissal payouts.

The minimum wage should be reviewed. If the coalition cannot bring itself to scrap it, then it certainly should not be imposed at a single national rate when there are very different labour market conditions around the country.

Finally, there should be a move away from national pay scales in the public sector and effort made to reduce union influence. National pay scales merely serve to distort the market and make it difficult for private businesses to create jobs in regions where employment is dominated by the public sector.

How can a businessman in Yorkshire seriously compete for the best talent when he is doing so against public sector bodies who are paying their employees the same as if they were living in the south east?

Such changes would no doubt be denounced by the unions as government and business trying to oppress the working man, but what must be remembered is that such changes would actually serve to increase employment and bring many new people into the workforce.

This can only be done by allowing businesses more freedom to hire and fire. The evidence shows strongly that the more employment protection legislation, the higher the long-term unemployment.

The Government has made a reasonably good start at reining in public spending; but to see significant growth in the economy it must allow the private sector the freedom to take up the slack.

Where the Government axe was focused on expenditure, it must now be wielded on red tape. It really is the only way to get the economy back on track.

Nick Hayns is a communication officer at The Institute of Economic Affairs