In the News

Will there be a post-Brexit wage boom?

Penny Brooks

12th May 2017

One of the reasons given by many who voted to leave the EU was that free movement of labour within the union led to lower wages in the UK. This is because a greater supply of labour means that the equilibrium price of that labour - the wage - is lower. Remove the extra supply by limiting the number of job-seekers coming here, and wages will rise again.

Or so says the theory.

What this doesn't take account of is the impact on a business's costs and therefore their breakeven point, and the strategies they will then use to lower their costs and restore breakeven. There is plenty of evidence to show that, where a similar policy has been used in the past in order to raise the wages for local labour by removing immigrant labour, businesses have opted to shift to more capital intensive production, thus eliminating the need to employ people. If they can't do that, they simply cease production. Either way, the policy gives no benefit to the local workers that it was designed to protect. 

This report gives the example of US farm workers in the 1960's, and also of Japanese factory workers now. Analysing business strategy in the face of the threat of higher wages could be a useful exercise for students. 

Penny Brooks

Formerly Head of Business and Economics and now Economics teacher, Business and Economics blogger and presenter for Tutor2u, and private tutor

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