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A golden high wage future?

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At the recent Conservative Conference, the Prime Minister revealed the Government’s plan for the post-Brexit and post-Covid economy:

we are not going back to the same old broken model with low wages low growth low skills and low productivity…the answer to the present stresses and strains…is not to reach for that same old lever of uncontrolled immigration to keep wages low… the direction in which this country is going now towards a high wage high skill high productivity…economy

Is this realistic? There are two immediate qualifications to be made. The first is that the intention is presumably to raise real, rather than nominal, wages. After all, in the 1970s, there were huge annual wage increases but these were swiftly wiped out by even larger price rises, in the “wage-price spiral”. This is not the intended model, one assumes. Secondly, one might note that, if it were indeed so straightforward to raise both productivity and real wages by reducing immigration, it is not clear why the Conservative Governments of the last 11 years have not done so. After all, throughout this period, UK governments had full “control” over non-EU immigration, which exceeded that from the EU.

It is clearly right that the route to higher real wages requires improvements in productivity. Most people would agree that it is desirable to move to an economy which offers well paid jobs and high levels of productivity. But will tighter controls on immigration achieve this objective?

Some context is important here. The UK has had a large and persistent productivity gap compared with, for example, France and Germany for at least the last sixty years. Other countries have achieved higher levels of productivity whilst accepting the benefit or burden of free movement within the EU. The UK’s productivity performance has been relatively poor throughout this period, in good times and in bad. Most notably, for present purposes, the UK’s productivity was lower than France and Germany when outside the EEC (until 1973), when inside the EEC/EU but receiving only limited European immigration (1973-1990s) and also when within the EU with a good deal of labour arriving from the Accession States (after 2000, approximately). So, it is not obvious that renouncing free movement provides some form of magic bullet which will accelerate productivity growth.

Moreover, the particular nature of the post-1979 UK economy is relevant. Most mature economies have, over time, shrunk their agricultural and industrial sectors, whilst expanding services. The UK has gone further and faster than most other countries in this respect, partly because it was the first to industrialise and partly as a matter of political choice. However, it has proved chronically difficult to increase productivity in the service sector, especially in areas such as hospitality and social care which rely heavily on immigrant labour. There are obvious reasons for this: it is much less easy to invest to promote efficiency in these sectors than, for example, by automation in a factory setting. Equally, the UK agricultural sector is already very lean, but also very dependent upon seasonal foreign workers: are there really large productivity gains to be made?

At the root of these arguments there is a more fundamental issue, which has barely begun to be explored. The underlying contention of the Johnson Government appears to be that, by reducing competition for jobs from skilled foreign workers, British workers will both fill the consequential gaps in the labour market and perform these jobs more efficiently than their non-British counterparts would have done. Furthermore, that this restriction in the supply of workers will compel businesses to pay higher real wages and invest in the means of improving productivity.

There are a number of potential problems with this new model.

Firstly, there is precious little evidence that reducing the available pool of workers leads to an upsurge in investment or productivity. On the contrary, there are many examples of successful economies pursuing a long-term model of high immigration and high productivity, notably the USA throughout much of its modern history.

Secondly, the government seems to envisage that it will be directing the supply and allocation of labour not only as to overall quantity but also as to the needs of particular industries (e.g., the allocation of permits to HGV workers). Such dirigisme in respect of the workforce is unprecedented in a market economy in peacetime and there is nothing to suggest that it is likely to be effective.

Thirdly, the Government has, by dint of the Withdrawal Agreement, created additional obstacles to trade with the EU. As Pascal Lamy, former head of the World Trade Organization, remarked in 2020, this was the first negotiation in history where both parties started off with free trade and discussed what barriers to erect. Thus far, the promised replacement trade deals, for example with the USA, have proved elusive.

Fourthly, whilst businesses might react to labour restrictions by investing as the government hopes, they might equally regard it as attractive to invest elsewhere (in the EU or USA) where there are no such limitations on the availability of labour. Foreign Direct Investment into the UK has already fallen sharply since the Brexit referendum.

Most economists supported remaining within the EU, on the basis of the perceived economic benefits of free trade within the Single Market. The dissenting minority, such as Patrick Minford, did not doubt the benefits of free trade but argued that the EU, by imposing its external tariff wall, was overly protectionist of sluggish European businesses. In essence, they suggested that the UK should unilaterally extend free access to its market to the whole world, rather than the EU alone, and that this would have a powerful effect in generating growth.

By contrast, Mr Johnson’s new economic “model” seems to favour, in effect, “capitalism in one country”, a sort of economic nationalism à la Trump. At the same Conference, Chris Loder, Conservative MP for West Dorset, argued that it would be good for supply chains to break since:

It will mean the farmer down the street will be able to sell their milk in the village shop like they did decades ago. It is because these commercial predators – the supermarkets – have wiped that out and I’d like to see that come back

There have been very few voices in the business community, or amongst economists, arguing for the sort of protectionism which the Government now appears to advocate. It may be possible to “take back control”. Whether this can be combined with a new economic model of high real wages and improved productivity appears more doubtful.

Please note: Views expressed are those of the author.

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