posted on 26 October 2016
from The Conversation
In the wake of Britain’s vote to leave the EU, the big debate has switched to what relationship the two should have post-Brexit. Top of the agenda is access to the single market and freedom of movement. As well as indications from the government that it is headed for a “hard Brexit" - which means leaving the single market and an end to freedom of movement - there has been much talk of limiting the number of foreign workers in businesses since the Brexit vote.
In an ebook for VoxEU on Brexit, I’ve analysed the research on how Brexit will affect the UK labour market, including jobs and wages. From an economic perspective, leaving the single market and curtailing immigration from the EU would not only be bad news for the British economy, but the evidence suggests that it would not bring much benefit to UK-born workers either.
The key trade-off is between free trade and control of the free movement of labour, with some nuances in between. Only weaker trade relationships, with higher transaction costs, would enable the UK to retain border controls on EU immigration, in a way similar to how non-EU immigration is restricted.
Most economists would argue that there is not much of a trade-off involved in this choice. The EU is the UK’s largest trade partner and losing free access to the single market would inevitably damage the UK economy. Colleagues of mine at the Centre for Economic Performance of the LSE have calculated that the increase in trade costs following Brexit would lead to a decline in GDP per head of between 1.3% and 2.6%, depending on resulting international agreements and access to the single market. Yet a desire to control immigration means that it is being debated nonetheless.
Costs and benefits
EU immigration has represented the bulk of the recent growth in the UK’s foreign-born population, especially after the EU enlargement of 2004. Plus, EU immigrants are on average younger, more educated and more likely to be in work than the UK-born population. It is worth stating, however, that this is not necessarily a bad thing for the UK economy or UK-born workers.
Much of the rise in EU immigration took place at a time when the unemployment rate for workers born in the UK was rising and their real wages were falling (during the recession years). But EU immigration kept rising after the end of the recession, while the unemployment rate of UK-born workers has fallen to pre-crisis levels and their real wages have started to grow.
There is, therefore, little or no correlation between immigration and the labour market prospects of people born in the UK for the economy as a whole. There is also evidence that UK local authorities that received larger EU migrant flows between 2008 and 2015 have not experienced any larger increase in unemployment of UK-born people or a deeper fall in their wages, even for the less skilled.
Research on the impact of immigration to the UK has detected no negative effects on the average wages of UK-born workers, albeit with possible losses at the bottom of the wage distribution and gains at the top. Research also shows that EU immigrants - being on average younger and more likely to be in work than the UK-born - tend to pay more in taxes than they receive in benefits.
Official data shows that low-skill EU immigrants tend to cluster in low-tech manufacturing, construction, private household and cleaning jobs, but are disproportionately less likely than unskilled UK-born workers to hold managerial roles. Skilled EU immigrants are much more likely to work in unskilled occupations for which they are over-educated, but they are also over-represented in finance and higher education.
Reducing EU immigrants
If the implementation of Brexit introduces restrictions on EU immigration in a way similar to the visa scheme currently in place for immigrants from outside the EU, the effect will mostly be noticed towards the top and the bottom of the job ladder (where EU immigrants are concentrated). If the ensuing gaps in the labour market were filled by a higher supply of UK-born workers and non-EU immigrants, wages and employment in these sectors would remain unchanged. But this is clearly unlikely, as UK-born workers are imperfect substitutes for immigrants.
Furthermore, for given skills and industries, UK-born workers are unwilling to work for the same wages as immigrants. The average hourly wage in the 15 UK industries with the highest concentration of immigrants from the 2004 accession countries is £9.32, significantly below average UK-born wages of £11.07.
It is therefore reasonable to expect labour shortages in sectors of the economy with a large presence of EU immigrants. In particular, food manufacturing, domestic personnel and the parts of the public sector already exposed to skill shortages such as health, social care, and education. One can thus expect an increase in prices and wages and/or further shortages in these sectors.
But wages in the sectors most affected by immigration would not rise significantly. The Bank of England’s post-Brexit revisions to its forecasts of earnings and inflation for 2018 imply a reduction of two percentage points in real earnings growth, compared with what was expected prior to the referendum. This means a mere 0.16% rise in wages for administrative and secretarial jobs, and 0.62% in skilled trades.
A further outcome of cutting inward EU migration might be greater mechanisation and automation in some sectors, most notably low-tech manufacturing. Reduced immigration may encourage moves to adopt labour-saving technologies and productivity growth. Thus, the UK workers involved in these sectors may lose out further.
So amid the debates over whether or not to reduce foreign workers in the UK, particularly from the EU, it’s worth bearing in mind the evidence that it is unlikely to benefit the economy, wages or employment. It could even lead to the loss of low-skilled manufacturing jobs.
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