11 March 2016

Certain sectors of UK economy heavily dependent on free movement

Migration continues to be a key issue in the EU referendum debate even if the campaigns have in recent days been making efforts to focus more on the wider economic arguments. Meanwhile, a new report by the Migration Observatory at the University of Oxford has found that, if the UK were to impose restrictions on migration in the wake of Brexit, it could “profoundly affect” areas of the economy that have come to rely heavily on migrant labour over the past 12 years. With EU workers heavily concentrated in certain industries such as hospitality, construction and manufacturing, it is these sectors that could be the hardest hit in the event of the free flow of workers being restricted after Brexit.

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Of course it is not inevitable that Brexit will amount to the end of free movement – this will have to be negotiated, and as we have pointed out many times, it is fundamentally linked to the question of market access, with both Norway and Switzerland having to accept it as a condition for their trade deals with the EU. That said, if the UK were to prioritise opting out of free movement over comprehensive market access, this would most likely restrict employers’ access to labour, especially with regards to low and semi-skilled workers.

Restricting migration post-Brexit is not a cost-free option

As the Migration Observatory report notes, this will force employers to either increase mechanisation or raise wages to make jobs more attractive. This echoes what Britain Stronger in Europe’s Lord Rose told MPs on the Treasury Select Committee last week. When asked whether restrictions on free movement after Brexit could see an increase in wages for low-skilled workers in the UK, he replied that “If you are short of labour the price will, frankly, go up. So yes. That’s not necessarily a good thing”.

This ‘gaffe’ touches on a key trade-off; the flip-side is that higher costs for employees are likely to be passed on to consumers. In other cases companies might reduce their output with some potentially going out of business altogether. As we noted in a previous blog post on this topic,

Restricting the potential labour supply would mean that the UK economy would react differently to future growth opportunities… limiting labour supply could make the UK less competitive by raising wages and prices. If this happened at the same time as the UK opened up to free trade and new low-cost competition from emerging markets in India and China, some UK-based businesses could find it even harder to compete.

Likewise, in our Brexit report, we concluded that

In order to be competitive outside the EU, Britain would need to keep a liberal policy for labour migration. However, of those voters who want to leave the EU, a majority rank limiting free movement and immigration as their main motivation, meaning the UK may move in the opposite direction.

While it is perfectly legitimate to campaign for Brexit on the basis this will reduce migration and provide a boost to UK workers’ wages, as with Brexit more broadly, this is not a cost free option. Moreover, it is inconsistent for Brexit supporters to argue that the UK needs to leave the EU in order to become more competitive, while at the same time welcoming increased costs for businesses in the form of higher wages.

Ultimately, restricting migration entails trade-offs be it higher wages for consumers or some businesses no longer being economically viable, and this in turn could make it harder for the UK to absorb any economic costs associated with leaving the EU.