This article is part of our special report Brexit: Where to, Brefugees?.
Britain’s labour market has so far been resilient but salaries could fall as a result of increased competition after the country exits the EU.
The UK’s decision to leave the EU after 44 years of membership was expected to trigger the perfect labour storm, frightening away companies and investors and lowering output. But uncertainty took less of a toll than expected and Britain has even succeeded in creating new jobs. However, this resilience may be tempered by falling salaries as a result of increased competition once the divorce is settled.
The UK’s Labour Force Survey reported this month that, between September and November 2016 and in the three months to February 2017, the number of people in work increased and the number of unemployed fell.
The number of people in work reached 31.84 million from December 2016 to February 2017, 39,000 more than for September to November 2016 and 312,000 more than the same period 12 months earlier. Employment stood at 74.6%, the highest since the survey began in 1971.
Meanwhile, there were 1.56 million unemployed, 45,000 fewer than for September to November 2016 and 141,000 fewer than a year earlier.
John Springford, director of research at the Centre for European Reform, explained that the economic slowdown and job losses have been less dramatic than predicted, as British consumers have kept spending on the back of their savings.
In addition, he noted that Britain’s labour market has proven to be “extremely flexible”, pointing to an unemployment rate that remained under 8% during the 2007-2008 financial crisis.
The European Commission agrees.
“Although the moderation in GDP growth may have a lagged impact on employment, the effect is expected to be relatively limited, reflecting the flexible response of real wages to weaker demand,” the institution said in its winter forecast published last February.
Days before the Commission’s forecast, the governor of the Bank of England, Mark Carney, stated that “growth has remained resilient since the referendum”. Its robustness led the central bank to conclude that the UK economy will be capable of maintaining the unemployment level below the 5% threshold at least until 2019, when the formal Brexit talks should reach their conclusion.
“Brexit journey is just beginning”
Carney’s optimism went beyond the Commission’s forecast. Brussels did not improve its unemployment rate for the UK, as it predicts 5.6% in 2018.
The executive will update its forecast for the EU member states on 11 May.
But Carney warned that “the Brexit journey is just beginning”. The future of jobs in the UK will depend largely on the future Association Agreement that London and Brussels will start negotiating once the divorce terms have been settled, most likely after this autumn.
This new relationship will not only bring the certainty that firms need to hire and spend, but it will also clarify how easily UK-based companies will be able to continue operating on EU soil.
Currently, some 12% of UK goods and services are exported to EU member states, translating into 3.3 million jobs.
The City of London looks set to suffer the most as a result of the break-up. Financial players could lose their passport to do business freely across the Channel. Law firms and accounting companies would be collateral victims.
Almost 1.1 million people worked in the financial services sector in the UK in 2015.
The services sector, especially financial and business services, today represents 41% of UK exports compared with 28% in 1997.
Other major exporters, like car manufacturers and suppliers “could be forced to retrench if obstacles to exporting to the EU increase”, said Iain Begg and Fabian Mushövel from the London School of Economics.
The automotive industry, together with the aerospace industry, computer and electronics, and pharmaceuticals industries, represents an important source of GDP growth and job creation for the UK.
But big manufacturers like Boeing and Google have expressed their commitment to creating new jobs in the UK once it leaves the EU.
There could be also a silver lining on the cloudy horizon of the complex divorce. Some industries could see job growth as they become more competitive, “either because a new trade regime raises the costs of imports or because they can then avoid regulations that impair their competitiveness”, said Begg and Mushövel.
As migration restrictions will be strengthened, low-paid jobs, such as plumbers and nannies, could also see demand for workers rise.
In order to maintain the export pulse, experts are eyeing the digital and creative industries as important drivers.
Unless both sides fail to seal a deal on the Brexit divorce and a new relationship, CER’s Springford said that the job market will remain stable. While in the short term there could be some relocation, in particular in the financial sector, in the long run the effect will be increased competition. This will push up production and wages could be slashed.
In addition, as savings continue to fall to historic low levels and inflation rises, Springford also warned that private consumption would no longer be the lifeline of the British economy.
Fighting for new jobs
In Europe, the EU institutions and national governments have repeated that while Brexit is bad news for the UK economy, it will also have adverse effects on their markets.
But behind their public lamentations, the EU’s national governments are fighting tooth and nail to poach thousands of jobs from the British Isles.
France, Germany, the Netherlands and Luxembourg are competing to attract well-paid bankers and traders.
A total of 89% of the employees (26,629) of the top five investment banks (Goldman Sachs, Morgan Stanley, JP Morgan, Citigroup and Bank of America Merrill Lynch) are based in the UK.
Around 40% of top 250 companies have their headquarters in London, compared with 8% in Paris, the second European capital on the list.
Meanwhile, carmarkers could move their operations in the UK to countries like Spain, in the case of Nissan-Renault, or Germany, in the case of Ford.