Britain could potentially leave the European Union — known as a Brexit — when the public vote in a referendum on June 23.
While Eurosceptics claim Britain leaving the EU will give the country greater control over its finances and immigration, Investec became the latest financial firm to warn against the risks of a Brexit.
This morning Nicola Mallard and her team at Investec outlined some of the biggest threats and notably how a Brexit would not only curb immigration, the long term fall in low-skilled workers as a result of this could devastate Britain’s food, drink and agriculture (FDA) industries.
Why? — because of huge wage inflation.
FDA industries are hugely reliant on cheap labour, much of which is comprised of EU migrants. The influx of foreign workers has allowed the UK’s labour force to grow by 0.5% per annum, without real wages rising with it.
In the very short term, Brexit would actually benefit FDA companies. Should Britain vote against leaving the EU, it would have a two year window to negotiate its exit — a window the report predicts would mean even more migrants trying to get into the country before its too late. Workers already here would also be less encouraged to leave.
But that labour growth wouldn’t last long.
When the stream of cheap labour is cut off in the wake of a Brexit, a resulting rise in wages would be a hammer blow to many FDA businesses who already spend shocking amounts on wages versus their profits before tax (PBT), suggested the Investec team.
In fact seven of the FDA business in the chart pay more than 250% of their PBTs on wages, a ratio which is barely sustainable without an inevitable wage rise if the UK decides to go it alone.
In the chart, the companies which have large workforces but low average wages also tend to have high salaries as a percentage of their profits. For any company relying on such a business model, a smaller workforce and higher wages could be catastrophic. In other words, it could cost companies more in wages for less staff.
Another important point to not ignore
There is another consideration that is frequently ignored by Brexit advocates — our agriculture industry doesn’t pull its weight and the EU actually pays Britain to maintain much of it.
As we can see from the lines in red, many UK farmers are hugely reliant on EU subsides.
The Common Agricultural Policy (CAP), established in 1957, aims to centrally stabilise markets by managing overall output. In many cases, this means paying farmers to not produce food.
A massive 46% of UK agriculture, mainly grazing farms in lowlands, failed to cover their costs in 2013-2014, relying on the CAP to for direct aid. A study by Degra found that more than 30% of British farms would be in negative income without CAP.
Clearly, this is an industry that will have mixed feelings on Brexit.
Of course, many would argue that migration depressing wages is all the more reason to vote in favour of Brexit, and that the CAP is antithetical to a Free Market.
But if Britain is destined for a future without the EU, it must be ready all the negative effects that come with it.
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