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.