How is UK unemployment so low despite Brexit turmoil?

Honda, Nissan, Toyota and a number of other companies have laid out plans to move production overseas, cut jobs or temporarily shut down UK production after Brexit.

London-based banks have taken on extra staff Dublin, Frankfurt and Paris.

Yet the latest official UK jobs figures paint what looks like a phenomenally rosy picture: Record numbers of people in work; unemployment at a 44-year low; and wages growing at their fastest pace since the financial crisis. Most of the growth in the last year has been among British nationals, according to the Office for National Statistics.

But are the figures as good as they seem?

Good news on employment

While the percentage of people in employment is at its highest for 44 years and the proportion who are economically inactive is at its lowest level ever this is far from being a vindication of the government’s economic policies and does not point to positive consequences of Brexit. 

Most of the jobs created in the UK since the financial crisis have been in low-paid, low-skilled sectors such as bars, social work and warehouses.

As wages have stagnated, it has been cheaper and less risky to take on extra staff than investing money in machinery, training or research and development. It’s relatively easy to get rid of workers, less so to recoup millions spent on a new high-tech warehouse you no longer need.

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Some firms have dispensed even with the risk of hiring staff by claiming that those staff are merely self-employed workers connected to customers by a technology platform.

Workers have done less well out of this situation. Poor wage growth and freezes to benefits have sent in-work poverty sharply upwards.

The average real wage is still £500 below its pre-crisis peak and the number of children living in poverty is on track to reach a record high by 2023-4, according to the Resolution Foundation think tank.

But wages are now going up

Yes they are. In the year to December, average earnings rose at their fastest pace in a decade. Surely proof that the Brexit doommongers are wrong?

Not really. While nominal wage growth is rising fast, this doesn’t take account of the rising cost of living.

When we factor in inflation, wages rose by a relatively modest 1.2 per cent over the year which is some way below the long-run average and less than pace when the UK voted to leave the EU in June 2016.

They are now beginning to rise not because the economy is faring particularly well but because the pool of cheap available labour is running out. 

One factor that may be affecting this is a reduction in net migration.

So could less migration mean higher wages?

There is no real evidence for that.

As Tom Pugh, UK economist at Capital Economics explains: “In theory, higher levels of net migration should increase the supply of labour, putting downward pressure on wages. 

“But more net migration also increases demand for goods and services which puts upward pressure on wages.”

In reality, most studies agree that these two factors more or less offset each other.

A sharp drop in the available workforce would be expected to boost wages, but only in the short term, says Jonathan Portes, professor of economics at King’s College in London.

“In the long-term you can’t pay yourself more than you earn.”

Ultimately wages can only rise sustainably if workers are more productive – if they make more goods and services for each hour they work.

But productivity in the UK is actually declining, according to the latest official figures. In part this is due to the fact that companies are holding off on investment because of Brexit uncertainty.

This effect may subside if uncertainty comes to an end but the fact remains that outside the EU, Britain is a considerably less attractive prospect for many firms looking to invest.

Skills mismatches

The decline in available labour could also lead to mismatches between skills available and job vacancies. We have already seen this situation in the NHS for example, which for a variety of reasons now has a very large number of vacancies. 

Such mismatches would also be expected to drag on productivity as people end up in roles they aren’t particularly good at or well-trained for.

Meanwhile, some of the world’s most productive companies – Nissan, Honda, Toyota, Airbus – are at various stages of implementing plans to cut thousands of UK jobs. Brexit is not the only factor at play here but it is certainly a key one.

Most of those companies have held off making such decisions for as long as possible. To move staff, offices and factories can be expensive. But with uncertainty dragging on, the point where those decisions become economically rational has now arrived for many firms and that certainly will not be good for British workers.

We’ll tell you what’s true. You can form your own view.

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