The Prospects for the UK Labour Market in the Post‐Brexit Era

Abstract

OVER THE last fifty years, the main challenges facing the UK labour market have shifted. In the 1970s and early 1980s, high wage and price inflation and a wage-price spiral were central concerns, before inflation and wage growth slowed dramatically from the mid-1990s. Mass unemployment became the central concern of the late 1980s and early 1990s, yet this too has given way as the UK now has the highest employment rate in its history. For nearly two decades up until 2007, earnings inequalities between the highest and lowest paid grew sharply; now this too has declined in salience. The financial crisis ushered in today's problems: stagnant wages and the (re-)emergence of insecure and casualised work. These shifts reflected changes in the wider economy, such as the end of the OPEC oil price hikes, but also changes in policy which responded to concerns. In the 1980s, governments allowed unemployment to rise in order to curb wage growth along with the emasculation of trade unions. The chronic worklessness of the mid-1990s (partly a result of the previous policy shift) induced a response of minimum wages, the extension of tax credits and subsidised childcare to make work more financially attractive, especially to (single) parents. Minimum wages and the rapid growth in the supply of graduates partly addressed earnings inequality. The post-Brexit era is likely to be another critical juncture in our jobs market. The decision to leave the European Union has already had profound effects. Some are obvious: sterling's depreciation after the vote has reduced real (after inflation) wages by around 4 per cent. Net migration has fallen, even before any change in the country's immigration system. Others shifts, such as lower investment by businesses unsure about the future, are more opaque. Looking forward, the key questions now are: has the Brexit-shock largely played out, or does it have much further to go, with further pressures arising until a final post-Brexit settlement is finally reached? And how will any Brexit-related pressures interact with pre-existing trends that are changing labour markets across advanced countries? In this chapter we will focus on three such trends: international migration, job polarisation driven by technological change, and the shifting of risk from firms and the state onto workers. First, however, we analyse recent developments in the UK labour market. Wages (after inflation) have been experiencing an unprecedented period of stagnation, with the last decade being the worst on record since the 1860s. As of June 2018, average wages were still 2.6 per cent below the pre-crisis peak, which equates to £680 a year for the typical (median) worker. Wage growth slowed before the financial crisis (from around 2002) and the post-crisis decade of stagnation has included two periods of falling pay. Each followed a major devaluation of sterling: first, soon after the recession hit, and the second, after the Brexit vote. Even outside the periods affected by the devaluations, (real) wage growth appears to be subdued at approximately 1 per cent a year. Wages used to respond to inflation shocks; in the 1970s oil price hikes resulted in a wage-price spiral. This no longer seems the case: following the two recent devaluations of sterling, import prices rose, thereby boosting inflation and eroding real wages. The post-referendum devaluation of 12 per cent pushed up prices by 4 per cent over 2017 and 2018, with no response from earnings. This is now unwinding and underlying real wage growth is still only around 1 per cent a year. This weakness reflects longer-run forces that determine wage growth: productivity and unemployment. One view is that the UK's poor productivity growth since the crisis, combined with imported inflation shocks, sent wages into negative territory. In this story, weak productivity drives weak wages. However, the post-2007 fall in productivity was driven by the fact that—unlike the experience in other countries