Madeleine Sumption: Brexit is not the only cause of London’s labour shortages but it is clearly one of them

Madeleine Sumption: Brexit is not the only cause of London’s labour shortages but it is clearly one of them

For many months parts of the UK’s economy have been suffering from shortages of workers, notably including London’s hospitality and healthcare sectors. Has Brexit and the resulting end of free movement of labour contributed to the problem?

The picture is quite mixed and different factors are involved. The tight UK labour market is by no means only a consequence of Brexit and the end of free movement. Other important factors have played a role, such as high inactivity rates among older workers and long-term problems some low-wage industries have faced.

High vacancies have been a feature of post-pandemic labour markets in other countries too, such as the United States. London has a 15% vacancy rate for NHS nurses compared to 11.8% in England on average, though this may largely result from the high cost of living in London, which has been a factor discouraging nurses from living in the capital.

However, the best evidence available so far suggests that leaving the European Union has indeed had a particular impact on London’s labour market.

Free movement came to an end at the beginning of 2021 and a new immigration system has meant that EU workers needing a visa in order to live or work in the UK in the same ways as those from elsewhere. Employers can sponsor workers from overseas to fill skilled jobs that pay more than £25,600 (or less in some specific cases), but there are no such options for recruiting for most low-wage jobs.

Given that work was the main reason EU citizens reported for moving to the UK under free movement, and given that EU citizens were overrepresented in low-wage occupations, leaving the EU has, therefore, been a big change.

Data to June 2021 show that by that point London had seen the biggest decline in employment of EU workers of any UK region since before the pandemic, with falls concentrated in hospitality and low-wage service jobs (see Figure 1 below).

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Since then non-EU migration has reached record levels – almost all of the net 504,000 people who arrived from overseas in the year to June 2022 came from outside the EU. However, non-EU migrants are often not in the same jobs that have been left empty due to lower EU migration. Non-EU workers tend to occupy higher-skilled positions, while many are students and do not work at all. As a result, labour shortages can exist even despite high levels of migration.

How have employers responded to the end of free movement? Public debate often focuses on the idea that labour shortages following the end of free movement might make employers increase wages. It is still early days, but so far there is limited evidence of this.

For example, median pay growth in hospitality, which saw the biggest decline in EU workers during the pandemic, has been well below average over the past two years. More data on wages will emerge to confirm or deny this picture, but a limited impact of immigration policy on wages would be consistent with previous research, which typically finds that immigration is not one of the major factors affecting pay.

Perhaps it is more likely that businesses will simply produce fewer of the labour intensive goods and services for which they previously relied on EU workers; and that they will automate more of the tasks that can be automated. So far, there is some qualitative evidence of increased automation but it is difficult to know how widespread it is.

Reasonable people will disagree about whether a tight labour market is a problem. One school of thought is that labour shortages do not need to be addressed using immigration policy because – at least in the private sector – they will resolve themselves over time. Another is that shortages should be addressed through immigration policy because recruitment difficulties in certain industries can be damaging to other industries that depend on them, such as HGV drivers.

Under this view, one policy option is to introduce targeted schemes for workers in specific jobs that are currently not eligible for work visas, but where the government thinks more immigration would be useful, though in practice it is surprisingly difficult to identify in an evidence-based way which occupations should benefit. That is especially true if you are interested in identifying shortages at the subnational level, for example in London, Scotland, or elsewhere.

A different policy approach is to introduce or expand untargeted visa programmes that permit low-wage work, such as the Youth Mobility Scheme. This has the benefit of not tying workers to employers, although they still lack other rights, such as the ability to bring dependants, receive benefits, or apply for permanent status. The fact that such schemes are not targeted means the government cannot decide which jobs workers will do or which part of the UK they will do them in. You may or may not see this as a downside, depending on how confident you are in the government’s ability to “pick winners”.

The other option in the face of labour shortages is simply to do nothing and hope that they will resolve themselves. Given apparent anxiety in government about high levels of non-EU migration recently, this option seems increasingly likely.

In short all the policy options present trade-offs between different pros and cons. But regardless of the strategy the government chooses, London will feel the consequences as it is likely to be a major destination for those workers the immigration system admits in the coming years.

Madeleine Sumption is Director of the Migration Observatory at Oxford University. Follow Madeleine on Twitter

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Categories: Analysis

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