The UK’s puzzling productivity problem

What will Tory immigration policy proposals mean for cheap labour and the UK economy?

Recent comments from home secretary Priti Patel on the UK’s post-Brexit immigration policy raised eyebrows among some employers, especially those that rely on cheap labour.   

Patel announced plans that will effectively prohibit most businesses from recruiting outside the UK for unskilled workers requiring qualifications equivalent to below an A-level, or who are to be paid less than £25,600 annually. Does this spell the end of cheap labour for the UK economy? And what impact will it have on productivity?

The UK, like a lot of Western economies, has suffered from a productivity decline since the mid-2000s, with productivity growth rates effectively flatlining since the 2007 financial crisis.

On the flip side, employment has been a bright spot in the economic landscape despite lacklustre GDP growth. This is a perplexing situation for the Bank of England, whose mandate is to keep prices stable and to some extent maintain low unemployment. These goals have been met over the past couple of years, preventing the Bank from raising interest rates.

While the economy has maintained a high level of employment, business investment in capital has been virtually non-existent. Instead, employers have substituted investment for a large supply of cheap labour from abroad. UK businesses are well behind some of their European peers, who deploy nearly three times as many robots, according to data published by the International Federation of Robotics.

But the new stance on immigration policy means that businesses will no longer be able to rely on low-skilled migrant workers. The obvious conclusion is that they will need to raise wages and invest more instead.

The Conservatives have already shown a willingness to raise the Living Wage. Current noises from the government suggest that immigration was never envisioned to be an alternative to increased investment in automation. The prime minister argues that he and his colleagues are entrusted to set the rules of the economic game, which for too long have been rigged against the interests of low-wage staff. Ironically, this paints Labour as the party backing free movement, and the Tories as the party championing workers’ rights. 

Whenever automation is mentioned, the instinctive reaction is to anticipate robots pushing people out of work. In countries such as South Korea and Sweden, however, the bots are not displacing humans entirely, simply pushing them into higher-paid work. This is seen by some economists as more than welcome, against a backdrop of UK wages only just beginning to rise above levels seen during the global financial crash.

That said, there are flaws in Patel’s thinking. One of her headline arguments is that more than eight million people – or 20% of the workforce aged between 16 and 64 – are currently economically inactive. She argues that the new immigration policy will mean that they will be able to fill the void left by a diminished immigrant workforce.

However, when those classed as economically inactive are surveyed, only 1.87 million out of 8.48 million say that they want to work. Of the remainder, the majority are students, sick, elderly, or caring for others. It is currently unclear how the home secretary intends to persuade such people into employment.

If the government is successful in channelling business investment towards automation and labour-saving practices, it is likely to result in rising minimum wages. This could enhance employee morale and work ethic, as well as reducing the turnover of staff. But what this means for businesses and the economy is more of a puzzle.

Sohail Singal is associate director at Chatham Financial.

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