Labour is the key Brexit issue for business and the market is already moving.

Post-Brexit immigration policy in the news…

Recent policy announcements suggest that the Government is developing its thinking on the UK’s immigration policy after Brexit. In the absence of specific policy details, speculation on the potential impact in areas such as wages, levels of unemployment and the potential increase in investment in robots has grown to fill the gap. However, I am not sure yet that we have really grasped what has happened in labour markets in recent years and hence what policy can realistically achieve.

…which is good because workers are the key Brexit issue for businesses…

I have spent the last few weeks meeting businesses and policy makers across the UK, after sessions in London, I have visited Hull, Newcastle, Liverpool, Manchester, Birmingham, Leeds, Edinburgh and Glasgow. I was surprised on my travels at the amount of time we spent talking about labour markets. This issue is, I would say based on this experience, top of mind for businesses in the Brexit process. For manufacturers, future trading arrangements are clearly top of mind, but manufacturers are also affected by any restrictions on access to labour as are many other businesses, overall labour is the most significant concern.

…because labour supply is already changing…

While some data has emerged on immigration in recent months, such as the fall in levels of applicants for nursing roles in the NHS, it is too early to have definitive data on how labour markets have responded to the UK’s decision to leave the EU. The majority of evidence is therefore anecdotal. However, there are a lot of anecdotes! Everywhere I went, I heard stories of businesses struggling to deal with a fall in skilled and non-skilled labour supply. Many managers told me their operations were reaching critical levels and the employment agencies they had been relying on to fill gaps were running out of staff.

The story was the same across sectors and geographies:

  • One manufacturing company owner described many areas of the UK outside of London as at “full employment for skilled and semi-skilled labour”.
  • In Scotland, the leading UK destination for inbound scientific R&D in 2016, I heard about problems already in recruiting and retaining EU researchers.
  • Logistics companies talked about shortages of skilled drivers and IT companies of the lack of programmers.

…and the solutions are not easy to identify…

We talked about technology as a potential solution to labour shortages. I suggested that as UK capital investment has been lagging GDP growth for some time, Brexit could provide the incentive for a wave of new investment.

Glossing over the fact technology cannot replace all forms of labour, the reality is with uncertainty about both the economic outlook and the future structure of UK trade, there is a reluctance on the part of businesses to enter into any significant capital commitments. Based on the coverage of the recent UK-US trade discussions for example, it is possible that a chicken processor faced with the risk of having to compete with cheaper imported US chicken in future, may be reluctant to commit to capital spend with an uncertain payback.

Even more significantly I believe, several companies pointed out they needed skilled people to install, maintain and operate new technology. Labour shortages don’t just impact labour supply they also affect the ability of businesses to do other things.

…because the labour market has changed…

What struck me most though was how the labour market works in practice. In theory, with skills shortages, wages should rise to bring more people into the labour market. However, the issue raised by the businesses I spoke to is that people may have left the UK but they have not left the labour market, rather they have just moved elsewhere. This means the market price for labour has not necessarily moved significantly and hence UK businesses in a number of sectors, particularly manufacturing, have limited scope to change their pay scales as doing so would make them uncompetitive.

This might explain why the impacts of immigration on wages have generally not been found to be adverse to any significant extent. By allowing UK based businesses access to skilled labour at competitive market prices, immigration is actually either creating, or at least helping retain, activity in the UK that would otherwise go elsewhere. It is effectively the opposite of offshoring.

To illustrate this, several business owners said that it is possible that at some point, especially if future trading arrangements for goods are similar to the situation today, the response to restricted access to skilled immigrant workers in the UK might have to be to move their UK factories to Eastern Europe – to be where the workers are. The UK may restrict immigration but this will not necessarily change the drivers of outcomes in the UK, as the UK labour market does not operate independently of international labour markets.

…and the immigration horse may have bolted.

The analysis of the EU referendum vote has identified that the desire to reduce immigration was a significant factor in the decision of many people who voted leave. While it may well be that these voters will perceive a lower number of immigrants as a positive factor, it is less clear that there will be a positive impact on the labour market and hence on the economy. Over time, the UK may be able to improve the skills of our workforce but in the interim there is a real risk of economic harm as businesses are unable to access the skills they require to run, maintain and grow their businesses.

In reality, by increasing the availability of skilled workers in other EU countries, restrictions on UK inflows may strengthen competitors to UK businesses located in other European countries.