LONDON — The British economy is set to face a “major labour supply shock” as foreign workers stop coming to the UK following the vote to leave the European Union last summer, according to new research from Deutsche Bank.
In recent decades, foreign workers, particularly those from EU countries, have filled in gaps in the UK labour market, helping companies to grow.
Foreign workers have also helped boost consumption, and therefore the wider economy, significantly.
But since the Brexit vote last June, the signs are that this stream of labour is starting to dry up, largely as foreign workers — who perhaps feel like they are no longer welcome in the UK — leave the country, and those who may have come to the UK decide not to do so.
Migration figures released at the end of August showed that total net migration was under 250,000 for the first time since 2014 at the start of 2017, and that is only set to get worse as the government continues to commit to ending the free movement of EU citizens to and from the UK.
That creates a huge problem, Deutsche Bank’s Mark Wall and Oliver Harvey argue, with supply in the UK’s labour market as the number of available workers — particularly for so-called “low skilled” jobs — dwindles.
On top of that, “a confluence of factors will exacerbate the effect for the labour market,” Wall and Harvey write.
“First, immigration has papered over weak domestic demographics. Growth in the labour force has been entirely due to foreign workers in recent years, and these added the lions’ share of jobs growth since the financial crisis,” they write, citing the chart below:
Secondly, the pair write, slack is very much lacking in the British labour market right now. On a basic level, a labour market with slack in it is one where there are more workers than there are jobs, while a tight market is the other way round.
Britain’s labour market is very tight, with Harvey and Wall noting that “the participation rate is at a record high, both for foreign and domestic born workers.”
The pair’s penultimate argument is that “the fall in net migration doesn’t seem to be related to weakness in the UK labour market, which would help offset a supply shock.”
Instead it is being caused by “external factors like an improving Eurozone economy and Brexit-related moral suasion” — whereby workers are leaving the UK simply because they don’t want to be here anymore.
This is illustrated by the fact that “employment demand remains relatively robust (up until now), with vacancies close to record highs,” Deutsche Bank notes.
For some Brexiteers, that labour shock is likely to be welcome, as it can be argued that falling migration will lead to higher wages for domestic workers, as the number of available roles and workers will start to rebalance, allowing domestic staff to push for pay rises.
That is a logical fallacy and overly simplifies what is actually likely to happen, Deutsche Bank suggests. Here’s what Harvey and Wall argue (emphasis ours):
“The familiar Brexit narrative is that a fall in migration should lead to higher wages as companies are forced to pay-up for domestic workers. The corollary to this is that the increase in net migration over the last two decades has suppressed earnings growth, at least for low skilled industries.
“While attractive for its simplicity, this narrative ignores some important considerations. The first is the link between productivity and wages. Wages cannot be raised sustainably above productivity without higher inflation. Otherwise, the labour costs of businesses will rise at the expense of profits.”
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