IES Viewpoint: UK employment and Brexit: the issues

Newsletter articles

27 Sep 2016

Employment Studies Issue 24

Nigel Meager, Institute Director

In the first issue of Employment Studies since the UK referendum on leaving the EU, it is inevitable that we should focus this viewpoint article on Brexit and its likely implications. Thus far, however, we know very little either about the shape of Brexit itself, and the terms which will be negotiated for the UK’s relationship with the EU, or about what all that will mean for employers and the workforce in the UK.

At the time of writing, little hard evidence has emerged: indeed, for the most part, the official labour market statistics[1] have continued to be very positive, with falling unemployment and an employment rate at record levels. So far, however, the statistics mainly cover the period up to the Brexit vote itself, and things may change towards the end of 2016. While less robust than official statistics, there are already signs from some of the surveys conducted by employer bodies and associations[2] of employers cutting back on recruitment activity, and even the official statistics show a recent turnaround in the previously strongly growing trend in unfilled vacancies (consistent with a cautious approach to hiring in the months before the vote).

IES does, however, plan to contribute to the discussion on this topic through our new ‘Brexit Observatory’[3] which will become a repository of key data, research findings and informed commentary on the employment implications of Brexit as they emerge. In line with IES’s mission to inform the decisions of both public employment policy-makers and employers, the Observatory will look both at the ‘macro’ level impact of Brexit on the labour market, and the ‘micro’ level impact on the policies and human resource practices of employers.

Where should we expect to look for impact? Clearly many potential impacts of Brexit will take time to feed through to the labour market, and it won’t always be straightforward to disentangle their aggregate employment effects from the effects of other non-Brexit related movements in the global and national economy.

At a more detailed level, much will depend on factors such as changing migration patterns, both those that are driven by individual decision-making following Brexit and those driven by changes in the rules governing migration for different groups as the process of leaving the EU unfolds. Much previous evidence[4] suggests that on balance the UK economy and labour market have benefited from increased migration levels, and it is tempting to conclude from this that Brexit-induced changes to migration patterns will therefore be detrimental. What’s more, there are obvious immediate concerns for sectors heavily reliant on migrant workers (as IES’s own work in the health sector highlights[5]). A lot, however, will depend on the skill mix of the sectors in question and the ease with which migrants can be replaced from the domestic workforce. Key unknowns relate to how (and how effectively) migration can be managed in the future – any points-based system for EU workers would, in effect, extend to all immigration the kind of managed approach we currently have for non-EU workers. Under such an approach, migration flows will be managed according to economic and labour market criteria determined by experts and bureaucrats. The effective functioning of such a system depends a lot on how sensitive and flexible to labour market circumstances the criteria (for allocating points, or otherwise managing migration) are, compared with the alternative of free movement and letting the labour market function as a market. It is easy to imagine that the bureaucracy will struggle to be sufficiently well-informed to avoid mismatch on the labour market, leading to skill shortages and unfilled vacancies.

Second, if skill mismatches are generated or exacerbated, much will depend on how the labour market adjusts, and what decisions employers and training providers make in response. Some commentators assume that the labour market will adjust quickly and effectively, either because employers will take steps to upskill the domestic workforce and/or pay higher wages in shortage occupations/sectors, or because government will provide appropriate incentives. The alternative scenario, of course, is that the capital market rather than the labour market will adjust – and businesses will increasingly see the UK as a lower-skill, lower-wage environment and take investment decisions accordingly (either by relocating high-skill activities outside the UK, or keeping the activities here but adopting lower-skill technologies to deliver them). Under that model, the long-established UK policy problem of a ‘low skill equilibrium’[6] would be exacerbated and the economy set on a lower-skill, lower-productivity, lower-wages trajectory than it would otherwise have been. This is without considering other possible Brexit-induced reasons for relocation of investment (eg in order to keep business activities inside the EU to avoid tariff or regulatory barriers).

Currently the consensus among labour economists[7] seems to be that labour market impacts of Brexit and changed migration patterns are most likely to be seen at the top and bottom ends of the skill distribution in the UK, and there is little evidence that these changes will improve prospects for UK-born workers. This will, however, be a key area to be monitored through IES’s Brexit Observatory.

Footnotes