Free Movement Of Labour

There has been a lot of debate prior to and since the Brexit vote around whether or not the EU's insistence on maintaining the right to free movement is a help or a hindrance to the further development of the EU. Farage and others blame free movement for forcing down wages though survey after survey show that it actually has negligible impact [Prime Economics - EU membership impact on wages]. Though it doesn't force wages down I believe it helps to restrain wage rises beyond what the market can bear and actually has the effect of pushing wages up on average throughout the EU, and is therefore a good thing.

So, how can Farage have got this so wrong? The reason is that he is focusing only on the local effects in the wealthier countries that have been the recipients of large number of Eastern European migrants and then putting the cart before the horse. If you take the EU as a whole, free movement ensures that the working population in each country is not geographically constrained. Being constrained in such a way would make the workforce exploitable by corporations/employers playing off one country against another in order to force down wages, or working conditions, or environmental protections, etc. The EU has a common set of laws in place to prevent these practices that would otherwise occur in the pursuit of the maximum return on capital. The fact that the workforce can relocate means that firms competing for labour in the countries vacated by economic migrants have to put wages up to retain the best staff - the ones that have a choice about where they work. This has the effect of raising the spending power of those citizens that stay-put and is a catalyst towards the re-balancing of the economies of the EU and standards of living across the EU. Firms will initially invest in those countries because they are cheap, and wages will rise to keep the best staff in those countries. This is a good thing - it means that on average free movement pushes wages up amongst skilled workers across the EU.

But how about in the countries that are the destinations of economic migrants - surely an influx of job-seekers will lead to more competition for jobs and therefore force down wages? As the referenced surveys have shown, this is not the case. Intuitively it is apparent that the vast majority of migrants relocate in order to find work so will target those economies that are growing, creating jobs and already have skills shortages. They are unlikely to target regions that have high unemployment or under-performing economies - to do so would just not make any sense. In migrating to countries that already have skill shortages they will certainly have the effect of constraining the growth of wages beyond a level that is competitive, which would normally be the consequence of a shortage of labour, but again this is a good thing as it holds down inflation and keeps the economies of the EU competitive. The idea that freedom of movement of people forces down wages simply does not fly - they would have to migrate to destinations that already have a surplus of labour and no minimum wage if they were to have the effect of reducing wages.

How about the fruit and veg pickers of East Anglia? Despite these workers not falling into the 'skilled workers' categorisation, the same analysis applies. Farmers consistently tell us that they hire migrant labour because they cannot get locals to do the work ie. the jobs already exist and the farmers are facing the same shortages in filling them. The wages they are offering must already be competitive across the EU as a whole, even if they are low, otherwise people wouldn't travel from the EU to the UK to fill them. Hence the wages for fruit pickers in East Anglia are already amongst the highest rates for the job in the EU. Preventing free movement will mean that farmers have to raise those already (relatively) high wages and will therefore become less competitive. Once we are outside the EU those farmers are going to have to put up wages to attract local workers and will require significant subsidies or else tariffs on fruit and veg imports from the EU if they are to remain in business. Or we continue to allow migration to fill these vacancies; ipso facto, Farage has sold the public a con - again.

Interesting refs:
Prime Economics - EU membership impact on wages
NIESR - Impact of immigration
Economics Help - The 'lump of labour' fallacy
Impact of EU migration
EU migration — the effects on UK jobs and wages

Will the last person able to leave Britain please turn out the light.

I felt compelled to write this post because amongst all the emotion and rhetoric of the Brexit debate the rationale behind the most contentious of the four freedoms on which the EU is founded - the free movement of people - seemed to get lost along the way. Of the four freedoms, I imagine that the free movement of goods and free movement of services are fairly well understood in general - they are designed to provide a more competitive single market with firms across the EU competing on a level playing field in order to drive out inefficiencies and increase productivity. Free movement of capital is also pretty straightforward - it aims to ensure that capital is deployed where it can be the most efficiently used and where it can find the appropriate balance between risk and return - this ensures that more investment funds are made available for business start-ups or for capital projects for expansion.

These three freedoms have a significant impact on EU citizens lives - they combine to make businesses in the EU more efficient, more entrepreneurial and more competitive. They have a significant impact but they do so invisibly - people are not particularly aware day-to-day of their effects and do not see any physical manifestation of those effects. Free movement of people on the other hand could not be more obvious to people - which is why it receives the attention it does and also why it is not always fully understood. So what benefit does free movement of people offer? Well firstly from a corporate point of view it allows firms within the EU to draw on a greater pool of labour which reduces supply-side constraints on the growth of their businesses. Obviously that's great for those firms as it allows them to grow faster than they may otherwise have done, and at a lower cost, but what does it do to benefit the people of the EU?  Let me explain by way of a hypothetical example ....

Imagine there are two countries within the EU one of which has free movement of labour but no free movement of capital (country 'A') and the other which enjoys free movement of capital but no free movement of labour (country 'B'). For country 'B', it's capital is free to move in or out of the country depending on whether or not it can get a better return elsewhere. Therefore in order to retain it's existing capital base and to attract more investment to its shores country 'B' needs to ensure that it is always minimising the costs to capital. This can be achieved by cutting wages, cutting environmental protections, removing health and safety guarantees, etc - to any extent it pleases as the workforce is unable to leave. Capital put to work in country 'B' has a captive workforce that cannot vote with its feet by going elsewhere to look for work and which is therefore ripe for exploitation.

On the other hand country 'A' has captive capital which cannot be redeployed elsewhere - it must work to generate a return within the country it finds itself in. In order to generate a return it will require a workforce to add value and generate exports. Those exports will bring money into the country and so generate the required return. The capital in country 'A' must compete with other countries in the EU to attract that workforce to come and sell their labour - and it must keep winning that competition in order to keep generating a return. So given that capital cannot move and the workforce can, what does it need to do in order to attract that workforce to its shores? The answer is plainly the polar opposite of the situation in country 'B' ie. it needs higher wages, better working conditions, shorter hours, etc. But it also means more infrastructure - schools, hospitals, housing, etc as that is what people come to expect as compensation for their labour.

Given the two situations described above it is self-evident that free movement of capital within the EU without the corresponding free movement of people is a flawed position to adopt and is why all four freedoms are so fiercely defended by the remaining EU members. They are right to defend them - free movement of capital without free movement of labour would simply mean a race to the bottom between countries trying to out do each other in minimising the cost to capital of their populations.

Unfortunately the people of Britain have just voted to put themselves in the position of country 'B' ie. a captive workforce with no right to leave the country to seek work elsewhere and with no restrictions on the movement of capital in or out of the country. I fear that those who voted the most fervently for Brexit (the unskilled) will ultimately be the victims of Brexit as a race to the bottom begins - the minority that do have sufficient qualifications and experience that they are able to get visas or work permits to work abroad may begin to leave the country and those who are not qualified will be left to scrape a living in a low-wage economy. The process of impoverishment has already begun with sterling's devaluation leaving Britons between ten and twenty percent poorer.

Of course, it could be argued that this is too simplistic and Britain could instead become a high-skill, high-wage economy. Unfortunately not only would this require massive and continuous investment in increased education and training (our productivity is currently woeful when compared to, for example, France or Germany) it is also irrelevant. Whether skilled or unskilled, any fungible worker will command a lower wage when his/her movement is constrained than when it is not - we may earn higher wages if we are skilled than if we are not but it is still less than we would earn with free movement in place ie. we have still managed to shoot ourselves in the foot.

I fear that what lies in store for Britain over the next decade or so is the gradual return of the 'brain drain' so damaging to Britain's economy in the 1960s and 70s.

"We just want our country back"

Supporters of Brexit cite a wide variety of reasons to explain their views.  These range from Brussels' alleged "meddling" in their affairs, to an objection to the size of the UK's contribution (almost always misrepresented in size and purpose), to the supposedly undemocratic nature of the Commission, and finally to the utterly feeble excuse of last resort which is emblazoned on their bus - "We want our country back".

Now I fully accept that some Brexit supporters use this slogan  in the context of repatriating democratic powers lost to Brussels, as they see it, but for a significant proportion it is just a poorly disguised call to racism.  Couched in terms of innocent, inoffensive simplicity it is actually just the opposite - it is in fact the secessionists' argument for withdrawal from the modern world.  What they "want back" is not a place but a time.  What they want back is the time before globalisation, before the Empire Windrush docked at Tilbury, before Idi Amin expelled the Ugandan Asians, before the fall of the Berlin Wall, and before the world shrank around them.

Today's world is characterised by technology that brings us all closer together and gives us far greater knowledge of foreign countries and cultures than previous generations ever had access to.  It is also characterised by increased travel for recreation and for work.  Wherever you settle in the world today you will hear all sorts of different languages and accents - this is a good thing as it reduces the fear of the unknown that people have about other nations and other cultures.  Unfortunately it seems to upset Nigel Farage.

In the past fears and demonisation of foreigners and of religions have allowed corrupt leaders to plunge their countries into the most horrendous of wars.  The sheer volume of travel and of cultural interaction today makes wars on such a scale less likely.  But pulling up the drawbridge and hiding behind the curtains will not stop this interaction from continuing in the rest of the world outside the UK.  It will however make the UK less relevant to and less engaged with the rest of the world.

UKIP-ers would like us to return to the Britain of the 1950s.  This is plainly not going to happen - the world has moved on, but it appears to have left UKIP behind.

More Farage Nonsense

Another of Nigel Farage's ridiculous claims on the ITV debate on Tuesday night was that the fact that the average worker in the UK has had a poor deal over the last ten years with wages stagnating or falling was entirely the fault of immigration.  He neglected to mention that in those ten years the UK has been through the worst financial crisis in over a century, two recessions and the largest fiscal consolidation in it's history, including a multi-year public sector pay freeze.  This of itself accounted for a significant proportion of the real-terms drop in income for most of the workforce.

He also forgot to mention that the UK is not alone in this - for example, the median male income in the USA is now lower in real-terms than it was in the 1970's.  This has nothing to do with immigration.  The main driver of wage stagnation in recent decades has been globalisation, increased competition and the growing income inequality between rich and poor.  This is an inevitable consequence of capitalism and is not a bad thing so long as governments are willing and able to intervene to redistribute income and to put a legally enforceable floor under wages.

Unfortunately the UK government since 2010 has done a poor job in this regard.  It has cut taxes for the rich instead of which it should have raised them.  It continues to allow the super-rich to avoid taxes through their use of tax havens.  It fails to collect anywhere close to the appropriate level of taxes on the UK operations of global corporations.  It has slashed corporation taxes, further contributing to an international race to the bottom, despite there being no evidence it will result in the higher overall tax take claimed.  In combination with the above it has also removed a significant number of the transfers (benefits and tax credits) that previously helped to redistribute income.  These transfers should not be considered as the drag on economic performance portrayed by the government but as a social necessity which ensures that the nation's income is shared fairly.

The government may have failed the public on taxes and redistribution but, worse, it has conned them with its 'living wage'.  The real living wage as calculated by the Living Wage Foundation (http://www.livingwage.org.uk/) is predicated on previously-existing in-work benefits remaining in place and is also set at a higher level than the government's measure; as those benefits have now been abolished, the governments living wage is nothing more than a gimmicky rebadge of the minimum wage.

So I agree with Farage that Britain deserves a pay rise but his analysis is completely dishonest.  The British public deserve better than to have to listen to any more of Farage's nonsense - rejecting it on June 23rd, then campaigning to have the UK Government collect more taxes and to introduce a real living wage would be a good start.

Giving Farage his dues

On Tuesday night's ITV debate on the UK's membership of the EU, Nigel Farage admitted that the Leave campaign's policy of reducing net immigration would lead to a lower UK GDP and a lower standard of living.  To his credit he has always been consistent on this - he has stuck to the line that "GDP isn't everything".

Farage's argument is that immigration increases competition for employment and therefore exerts a downward pressure on wages.  So, his theory goes, reducing immigration will allow wages to rise again.  This may well be true in the short term however the flip-side to this is that those short-term wage rises will cause output prices to rise and therefore sales to fall, and so will result in longer-term job losses and unemployment.  An increase in unemployment will in turn cause wages to fall back again, resulting in lower pay, lower GDP and permanently higher unemployment.

There are two ways to constrain output price rises - either by increasing productivity (output per capita) or else by restricting wage growth.  For Farage's wage increases to persist rather than resulting in unemployment would require permanent increases in productivity.  This would be reliant on investment in skills and in infrastructure, which would require money to be spent.  That extra spending would be at the cost of other spending priorities or else taxes would need to rise.  Unfortunately Farage didn't get around to explaining that part - "Vote Leave, pay higher taxes".

Without productivity improvements there will always need to be competition for employment  in order for the UK to remain competitive.  That competition is created either through immigration or through the laws of supply and demand via the mechanism of unemployment; it is unavoidable and slamming the doors shut won't prevent it.  I would prefer to see full employment with immigration than no immigration and permanently higher levels of unemployment.

Allowing free movement is the free-market solution - the laws of supply and demand will determine where people choose to migrate to.  To all intents and purposes there is currently zero unemployment in the UK which is why people come here; if unemployment were to increase in the UK (eg. if productivity increased more rapidly in other EU countries than it did here) people would naturally stop coming here to look for work.  The Eastern Bloc have far lower wages than the UK and as their infrastructure develops and more businesses choose to locate themselves there the flow of migrant labour will reduce and may even reverse - anyone remember 'Auf Wiedersehen Pet' and all the British brickies who moved to Germany looking for work in the 1980's ?  We seem to have developed short memories since then ...

So to give Farage his due he has been consistent in arguing for higher unemployment and a lower standard of living, it's just that he chose not to phrase it quite like that.

The Brexit Debate

One of the most puzzling refrains heard throughout this seemingly endless referendum campaign is 'no-one is just giving us the facts'.  Seriously?  Is that maybe because it is impossible to predict the future with any degree of certainty?  There are plenty of statistics and data out there if people care to look but Remain or Leave, it doesn't matter - both choices rely on a degree of guesswork as to what the impact will be.  It is however possible to state where we are now and how we got here; so here are some of the aspects of the 'debate' that concern me and the conclusions/questions I draw from them ...

1) Britain contributes £350 million per week to the EU budget.  Britain receives £190 million per week from the EU in agricultural subsidies, research grants, development grants and the like.  The net contribution is therefore around £160 million per week, or less than 0.5% of GDP.  Not a huge price to pay for access to an economy the same size as that of the USA and more than 500 million consumers.  Would we get a deal at that price outside the EU ?  We just don't know. ...

2) Britain joined the EU in 1973 when it's economy was known for being 'the sick man of Europe' with high unemployment, high inflation, falling exports, and failing industries. Since then, while inside the EU, the economy has recovered and is now the 5th largest in the world, behind only USA, China, Japan and Germany.  We can't know how Britain would have fared if it had remained outside the EU or how Britain will fare if it leaves but purely in terms of population size it is unlikely that Britain would have or will overtake any of these apart from possibly Germany.  So I am unsure why Brexitters consider EU membership to be a hindrance.  Will our economy be any further up the league table in 10 years time if we are outside the EU?  Unlikely - it is more likely to shrink in relative terms.

3) Because Britain has close to zero unemployment, inward migration is driven by continuing demand for additional labour from businesses.  Cutting off this source of labour, as Brexitters intend, implies wage rises to compete for a smaller pool of labour, which ultimately will make UK-plc less competitive and cause unemployment to rise.  This will have the effect of reducing wages again until they settle at an equilibrium point with a lower GDP as a result of there being fewer people in work and at lower wages.  Either that or the Brexitters' wishes on immigration have to be ignored, even if they win the referendum, in order to keep the UK competitive.

4) Only a half our current net annual inward migration figure of 330,000 comes from EU countries.  Leaving the EU is unlikely to put a halt to immigration, due to point 3 above - in fact it is likely to mean that immigration from poorer, non-EU, countries increases to meet the needs of business and of public services.  If Brexitters are concerned about cultural dilution it is only going to get worse if we leave the EU - we have more in common with our Eastern European neighbours than we do with those from outside Europe.

5) From WWII to the collapse of the Berlin Wall and the Warsaw Pact countries in 1989 the UK lived under the constant and imminent threat of conflict with the USSR.  Since then it has been the West's objective to encourage the former Eastern Bloc countries to convert into liberal democracies with market economies - welcoming them into the EU was a part of that process.  Many Brexitters aspire not just to leave the EU but to see it's break-up.  If that were to happen the Eastern Bloc countries are more likely to fall back under Russia's suffocating influence - or, worse, to see occupation/annexation as has occurred in Ukraine and the Crimea.  Without European solidarity in the form of the EU how would Europe coordinate any kind of response amongst 28 countries living at different degrees of proximity to the Russian threat?  Or are Brexitters relying on NATO for any such response, and if so don't they think that would represent a major escalation of tensions?  Personally I feel we should show more solidarity with these nascent European democracies and keep the EU together.

For the record, and as I have blogged repeatedly since the referendum was announced in 2013, I think the Brexitters will win but I think it will be the most short-sighted and depressing decision this country has ever made.  My wife and kids, luckily for them, are entitled to Irish passports so once free movement is abolished they can still tootle through passport control while I have to faff about with immigration/visas.  Or maybe once people realise what a pain travelling in Europe is without free movement it will be reintroduced - in which case, what was the point?

Will Brexit succeed in reducing immigration?

One of the many justifications offered by advocates of Brexit is that it will allow the UK to "regain control of it's borders".  I am doubtful that this is the case; it may do so, but if so it will come at a price.

Following Brexit, should that be the electorate's verdict, supporters and opponents alike will be hoping that the UK's economy continues to grow (as measured by GDP - the sum total of the nation's economic output).  For a nation's GDP to grow either the existing workforce needs to become more productive (generate more output, in terms of goods and services, at a lower unit cost) or the workforce needs to grow.  In the UK over the last 20 years or so, this demand for more labour has been met by immigration.  The UK's unemployment rate currently stands at 5.1%.  In such a low unemployment environment if a company wants to expand it's business but access to immigrant labour has been removed it will need to raise wages in order to hire more people - to poach them away from other employers.  This may appear superficially attractive, giving workers a pay rise, but in the long run it is bad news.  The UK has a long running productivity problem (currently worse than France's), which makes our exports relatively expensive.  This has led to us having the worst trade deficit in our history - we import massively more goods and services than we export.  If wages rise we become more unproductive and the deficit becomes worse - a situation which in the long run is not sustainable.

So, post-Brexit, wages will tend to stabilise at a level at which our productivity does not worsen and as a nation we are able to continue to compete.  Competition for employment is what constrains wage growth - when we no longer have immigration to provide that competition it will be provided instead by an increase in unemployment.  The market will drive up our productivity through the mechanism of falling exports leading to higher unemployment.  The final result of a Brexit followed by closing the borders will be a shrinking GDP, falling wages and higher unemployment.  That increase in unemployment has associated welfare costs which will have to come out of a smaller tax take due to the smaller size of our economy.

Overall post-Brexit Britain is not an attractive prospect, which is why I think those who vote for Brexit in order to reduce immigration will find themselves disappointed.  No government wants to preside over a shrinking economy, permanent recession and falling living standards - for this reason I believe Governments will continue to listen to the demands of business and the borders will remain open.  Globally, mass immigration is here to stay and our time would be better spent in finding ways to live with it.