Share
Save
Despite dysfunction in Westminster, public support for Brexit has held up remarkably well over the past three years. Polls suggest that at this week’s European parliament elections Nigel Farage’s Brexit Party, which advocates leaving the European Union with no deal, will overtake both the Conservatives and Labour. And when voters are asked about their opinion on remaining versus leaving the EU, the country seems just as evenly divided as in 2016.
At least part of the reason is economic. Taken as a whole, the economy has performed averagely since the Brexit referendum. Growth has slowed, although not to the extent some thought after June 2016.
But viewed from a distributional perspective — that is to say, which parts of the country have done well and which have lost out — a very different picture emerges.
Take April’s UK labour market report. Average weekly earnings, the headline indicator of pay in the country, have been rising recently — good news for the consumer. But in a less analysed part of the ONS’s report, the data shows that most of the recent gains have accrued to lower income workers.
Indeed, since the second quarter of 2016, wages for both the 10 per cent and 25 per cent lowest paid workers have risen at their fastest rate in a decade and a half. By contrast, wage growth for the 10 per cent highest paid has been much more disappointing – failing to surpass recent highs in 2015.
One reason is, paradoxically, that firms have stopped investing. Business investment shrunk by £48 billion in 2018, with uncertainty about Brexit playing a major role. Since firms still needed to meet demand, they hired workers to plug the gap. The number of jobs increased by 500,000 in the same period.
Crucially, a large body of academic evidence suggests that the substitution of labour for capital (in other words, workers being replaced by machines) is a prime cause of income inequality. Higher-skilled workers tend to benefit from the introduction of new technologies, while the less nimble miss out. The reverse is also true. A weak investment environment but strong labour market — in economic parlance, “capital widening” — has helped to bid up wages for lower skilled workers relative to higher skilled ones.
A second reason for the lower paid doing better has been falling immigration. Last year, employment of EU workers fell by 75,000, the largest drop on record. While the relationship between immigration and pay growth is hotly contested, a labour market supply shock like this should, at least in the in the short term, raise domestic workers’ bargaining power.
Finally, another key factor behind distributional outcomes in the economy — fiscal policy — has U-turned abruptly since the referendum. In last year’s Budget, the government committed to the largest discretionary loosening of fiscal policy since 2010, according to the OBR, with the lion’s share of new spending going to the NHS. Austerity, which according to many studies contributed to widening inequality from 2010 to 2016, is in reverse.
These trends are reflected in economic sentiment. The European Commission’s Ecofin survey tracks consumers’ economic expectations based on their level of educational attainment. A consistent theme since 2016 has been graduates feeling very pessimistic about their economic future, while the less skilled have felt much more bullish. While it is important not to generalise, educational qualifications were one of the best predictors of Brexit voting intentions.
Put all the above together and the fact is that, economically speaking, Brexit has so far delivered very nicely for many of the so-called “left behind” who voted for it.
Can these trends continue? The short answer is no. The UK’s current growth mix of a strong labour market and weak investment is a short-term positive for those at the lower end of the income distribution. But in the long term it is nearly impossible for real incomes to decouple from productivity.
And here, the UK’s performance since Brexit remains dire. Output per hour has shrunk by 0.1 per cent in the past 12 months. Unless productivity picks up, firms will simply start to transfer the cost of more expensive workers into prices. Weak business investment is, of course, one of the primary reasons for weak productivity in the UK.
The welfare boost enjoyed by lower income workers since Brexit will thus start to wane as inflation eats into earnings. But by then the Brexit dividend may have lasted just long enough to maintain the political momentum to take the UK out of the EU.
Oliver Harvey is head of UK macro and Brexit research at Deutsche Bank. These are the personal views of the author and do not necessarily reflect the views of Deutsche Bank