Labour’s plan for worker’s shares is both naïve and dangerous

A new dangerous and economically illiterate plan has been hatched by the UK’s hard-left Shadow Chancellor John McDonnell and presented to Labour’s conference in Liverpool: companies with more than 250 workers will be forced to hand over 10% of their equity to workers. Apparently, dividends from this equity will be split between the workers and the government, with the first £500 going to each worker and the remainder allocated to a “social dividend” to be spent by the government on public services. According to Labour’s calculations, around 40% of the UK’s private sector workforce – some 10.7 million people – would initially be covered by the scheme.

Labour claims that the initiative will ensure better run companies and more long-term decision making, but quite how that is the case is not clear, neither is it obvious why companies would not hand over equity to workers voluntarily if indeed it was true that it would improve business performance. Reality is that John McDonnell is not endowed with some magic insight into corporate governance which makes him capable of coming up with a proposal which benefits businesses across the board, but which businesses themselves are not able to come up with and therefore need to be forced to implement.

Of course the policy is also a horrific infringement of private property rights (something we should not be surprised by), but apart from that it is extremely badly thought through. Here are five obvious reasons to consign it to the scrapheap of idiotic socialist policy proposals:

1. The most obvious effect is that it will make it less attractive to run a UK business. Combined with a deluge of other business unfriendly policies, most prominently a reversal of the Tories corporation tax cuts, it could be the tipping point for some businesses relocating overseas – or it could make UK businesses more prone to overseas takeovers.
2. It will make it relatively less attractive to run a large business, which will effect decision making in several ways. The cost of the 250^th employee is set to be colossal, so many will look to avoid getting to that size. Companies may be split up to reduce the number of employees in each entity, reducing economies of scale and lowering productivity. And the policy will cost jobs as automatization will be comparatively more attractive to businesses looking to reduce growth in staff requirements.
3. It could affect corporate behaviour in sub-optimal ways, as dividend payments may be less attractive because they are paid out to workers and government.
4. Employers will look to recoup the lost money, and one way is by reduced salaries. Employees of large companies now have a mandatory equity dividend as part of their pay package, which means there will be pressure on other parts of their compensation.
5. Many of the companies who will be forced to give away 10% of their equity are publicly listed and partly owned by the largest investor in the UK: the pension funds. So, it is not just “fat cats” (whoever that is?) who will be hurt by the policy: ordinary people’s private pensions will be decimated too, as shares tank in response to it.

The policy is, in other words, both naïve and economically illiterate. It ignores incentives and secondary consequences. It is dangerous. It is another sign that with a Labour government which is proudly socialist the UK will be heading down the road which has been travelled with tragic consequences by countries such as Venezuela. Most of us like to think a Venezuelan style disaster is only really possible in the third world. We may yet be proven wrong by McDonnell and his dangerous comrades in Labour.