New legislation announced by George Osborne at the Conservative party conference today will introduce a new type of employment contract under which existing employment protection will be dropped in favour of employee shares in the firm, exempted from capital gains tax. In his speech the Chancellor said: 'Workers: replace your old rights of unfair dismissal and redundancy with new rights of ownership.And what will the Government do? We’ll charge no capital gains tax at all on the profit you make on your shares. Zero percent capital gains tax for these new employee-owners. Get shares and become owners of the company you work for. Owners, workers, and the taxman, all in it together. Workers of the world unite.” '

The impression given here is that workers are being invited to trade their existing employment rights (to redundancy, to claim unfair dismissal and to request flexible working) for shares. The Chancellor presumably thinks that such trades would be in the interest of both sides. How likely is it that this will be the case?

For such trades to take place (assuming both parties are rational) the expected value of the shares from the worker's perspective would need to be greater than the expected value of the rights being given up, and the opposite would need to be the case for the employer.

However the expected values will more likely than not be /negatively/ correlated- the more the employment protection is worth, the less the shares will be worth. Employment protection- more specifically, redundancy pay- is worth more to the worker (and has a higher expected cost for the employer) the higher the risk of redundancy. However the expected value of shares will be lower the greater the risk to the worker of redundancy: as a large empirical literature shows, announcements of layoffs are associated with falls in share prices (see for example the review here Thus the employer (or the existing shareholders) will have to sacrifice more of their share of the profits (offer more shares to the workers) to induce workers to give up their rights, the greater the risk of redundancy- assuming the trade is fair, of course.

So we should expect trades to take place only when the perceived risk of redundancy from both the worker's and employer's perspective is low: but under these circumstances the incentive for the employer to trade at all will be weak. This is not a promising set up for rational trading of rights against shares- and we haven't even considered how information asymmetry and risk aversion might increase the price rational workers would demand for giving up security (the fact that an employer is making this sort of offer at all would surely be interpreted as evidence of their future intentions by the workers, for example). There is of course the capital gains tax bribe, but redundancy payments are already tax-free up to £30,000. Given all these considerations,I can see little reason to expect many voluntary trades of rights for shares to take place.

This might suggest that the Chancellor's proposal will have little impact, as both Brendan Barber of the TUC and business representatives have argued for different reasons. But it seems obvious that the policy is not intended for existing employees, but for employers recruiting new staff. The Treasury press notice states: 'Owner-employee status will be optional for existing employees, but both established companies and new start-ups can choose to offer only this new type of contract for new hires.' My guess is that if these new contracts do have more than a marginal impact, it will not be because existing workers have made a rational choice to exchange their rights for a share of the profits, but because new employees have chosen employment even under these less favourable conditions over unemployment.