Some potential impacts of Brexit on real wages

Europe Economics Blog
Aug 31, 2016

On 23 June 2016, the UK voted, in its referendum on EU membership, to leave the EU. British exit from the EU is commonly referred to as “Brexit”. In this note we shall consider five ways Brexit might be expected to effect real wages: GDP; the share of wages in GDP; immigration; regulation; and prices.

First, other things being equal, one would expect real wages to be higher if real GDP is higher and lower if it is lower. Almost all economists (including pro-Brexit economists) expect GDP growth to be slower in the short-term in the run-up to Brexit and period immediately following. We should therefore expect real wage growth to be slower in that period than it would have been had the UK voted to Remain. Impacts over the longer-term are slightly more disputed, with around 30 per cent of economists expecting the short-term losses at around the time of Brexit to be recovered over the longer term, with the considerable majority (about 70 per cent) expecting there to be long-term losses, also. If the minority view is correct, that would tend to imply faster real wage growth in the period after the initial Brexit disturbance (say, from two or three years after Brexit on), whilst if the majority of economists are correct, one should expect wage growth to be slower later, also.

We said the above might be true, other things being equal. But they might not be. Brexit might affect the share of GDP that goes on wages. That could happen if, for example, Brexit changed the structure of the economy so that it because more or less capital-intensive. An increase in capital-intensiveness could be the result of, say, the role of manufacturing in the economy rising. That might mean that, post-Brexit, real wage growth could be even slower than implied by slower GDP growth, because a higher proportion of GDP was being shifted to returns on capital and less to wages.

Another factor affecting real wages could be immigration. Immigration tends to boost GDP and GDP per capita, so if Brexit leads to less immigration (as expected) that might be one of the factors meaning slower GDP growth, as described above. But, in addition, immigration also supply additional wage pressure (since firms can source workers from abroad to compete with those offered domestically). That might mean that a drop in immigration, as well as reducing real wages through slower GDP growth, might also have a partially-countervailing tendency to raise real wages, through increasing domestic workers’ bargaining power.

Regulation might affect real wages in a number of ways. One way could be via an effect on GDP growth, as described above. But there are also EU-related regulations that directly affect workers, including some that the UK has a history of opposing – e.g. the Working Time Directive. If the UK, post-Brexit, tended to reduce some employment-rights-related legislation, that might mean that real wages rose, to partially compensate (firms would need to offer slightly higher wages to attract workers, if working conditions were slightly less attractive).

Finally, we note that real wages might be affected by Brexit if Brexit means more or less inflation. When the referendum result was announced, the trade-weighted value of sterling fell. That means imports into the UK become more expensive, raising the price level for consumers. The Bank of England responded to the vote by cutting interest rates, which might also raise inflation. On the other hand, Brexit itself might mean a cut in tariffs on imports from the non-EU world – e.g. on food. That could mean lower prices, raising real wages.

Thus, Brexit can be expected to have a range of complex impacts on real wages, both positive and negative. There will also be different impacts in different sectors. We shall need to study more to see how it plays out.

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