Globalisation: Not as big an elephant as we thought

Most of you are probably familiar with the Elephant Chart which shows the changes in the global income distribution over the three decades before the last recession. It came from a World Bank paper by Branko Milanovic and shows the increase or decrease in real incomes at each percentile. It shows big gains in the middle and lower percentiles, falling incomes at the upper middle while the very poor see almost no income growth and the very rich, as ever, see their incomes continue to rise steadily.

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The chart has been cited a lot recently, especially when explaining the Brexit vote, the rise of Donald Trump and the growth of populist movements in the developed economies. The less well-off in the developing economies have done well and millions have been lifted out of poverty. At the same time, and some would say inevitably, skilled middle-earners in the developed economies have suffered as their jobs have been offshored and their wages have stagnated. It’s no-wonder they are angry, the story goes, because they have lost out while the poor of Asia have gained. A nationalist or socialist backlash against globalisation is therefore hardly surprising.

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I have reached for this chart many times, especially when writing about Brexit and UKIP, but something always made me put it back on the shelf. I haven’t the time, the resources or the expertise to dig into the data behind it but I did wonder how far it applied to the UK and whether it was mostly the story of two big countries, China and the USA.

As it turns out I was half right. Adam Corlett of the Resolution Foundation has produced a very detailed analysis of the data which shows that the story is somewhat more complex than some people are making out. Before going any further, it is worth mentioning that the Resolution Foundation’s intention was not to trash Branko Milanovic’s work but to point out that some of the claims people were making about it are not really supported by the evidence.

Now before you switch off and assume that this is some dry academic argument, it really is worth persevering with the Resolution Foundation report because the story that emerges from it tells us so much about what has been happening to incomes and work throughout the world over the past thirty years. There is too much in the report to cover in one post but I will attempt to summarise the story about income distribution here and discuss some of the conclusions.

This is an argument that builds up stage by stage.

The countries in the 1988 data set are not the same as those in 2008

As more data became available, more countries were added to the data set. Most, through not all, were poorer countries. If you compare the data of countries that were in both the 1988 and 2008 surveys, the effect is less pronounced and the income drop in the upper middle percentiles disappears.

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Population growth in poorer countries has moved the rich counties further up the curve

Because the population of poor countries has risen more quickly than those of richer countries, they now account for a greater share of the world’s population. The people at around the 75th percentile of the world’s income distribution were the poorer American workers in 1988 but by 2008 many of the people at that point in the income distribution were urban Chinese. But while the urban Chinese have seen their wages increase they are still, in real terms, not up to where US workers were in 1988. Therefore there is a dip in the curve at around the 75th percentile. The US workers are no longer in the same position on the distribution because population growth has pushed them up to a higher percentile.

As the Resolution Foundation explains:

For example, the poorest decile of people in the US were in the 70-75th percentile range in 1988. But population growth among poorer countries would have pushed those Americans up into the 75th-80th percentile range by 2008. The bottom US decile would be replaced in the 70-75th percentile part of the global distribution by the richest urban Chinese, but the latter’s average income was around $1,500 compared to the former’s $2,600: producing a fall in the average income of those percentiles.

This chart by Chris Giles shows how the poor US families have moved up the global income ranking.

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The socio-economic groups who support Donald Trump might have been at the point where the curve dips in 1988 but they are not there now.

Japan and the former communist countries drag down the figures for the mature economies

Globalisation wasn’t the only thing going on in the 30 years before 2008. In the former Eastern Bloc, the collapse of communism hit incomes of the poorest particularly hard. At the same time, Japan saw the bursting of its economic bubble. This dragged down overall income growth in the developed economies. The overall picture, then, is distorted by local single-country issues rather than global ones. Once you strip out Japan and the former communist countries, income growth in the rest of the developed world doesn’t look too bad.

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Almost all of the rapid income growth among the poor happened in China

This is the bit where I was half right. Incomes for almost all of China’s income distribution rose at a faster rate than that of most other parts of the world. If you control for population and remove Japan and the former communist countries, the elephant shape becomes less pronounced. Take out China and it disappears altogether.

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So when you control for population and take out China, the ex-communist countries and Japan, income growth in the rest of the world looks remarkable even. Apart from among the very poorest and the very richest, it’s been somewhere between 30 and 50 percent at each percentile.

There are a number of conclusions that we can draw from this:

Income growth is as much a function of local factors as global ones

The figures on the elephant chart were skewed by things that happened in specific countries, such as the fall of communism, Japan’s stagnation and China’s rapid rise. What happened in China or Japan isn’t typical of the rest of Asia and what has happened in Eastern Europe isn’t typical of the rest of Europe. We should not assume a rise of Asia and fall of Europe story from these figures. There are also, as the Resolution Foundation report points out, local factors at work in the US and UK. For example, rising housing costs are a something of a British idiosyncrasy but you can’t draw conclusions about income growth in the UK without taking them into account.

Globalisation is not to blame for the squeeze on middle-incomes in the developed world 

As the Resolution Foundation’s Torsten Bell explains:

If we then dig into the big variation between individual countries it becomes clear that even this weak income growth is not a universal feature of low and middle income people in developed countries, but instead driven by the experience of Japan (where the data appears to be plain wrong) and ex-Soviet satellite states (who faced big income falls as the Soviet Union collapsed). These income changes are important, but again tell us very little about income levels in Western economies.

It is true that the US has seen very poor income growth, with the rich benefiting the most from what limited growth there was. But that experience is to quite a degree one of US exceptionalism. Variation amongst the developed world should make us reluctant to accept that this is inevitable or simply driven by global forces.

The report is not suggesting that globalisation hasn’t brought challenges. It has clearly had a significant impact on employment in some industries but it is far from the only factor causing low income growth.

Which means that government policy matters

For the past quarter of a century we have been hearing about the Global Race in which lots of hard-working but low-paid Asians would take people’s jobs if they didn’t run fast enough, running fast being a metaphor for accepting longer hours, poorer working conditions and lower pay.

But, as Torsten says, “Weak income growth generally is rooted in domestic policy.” By and large, he says, rapidly rising housing costs and the collapse of a financial services industry which was a major part of our economy are to blame for the UK’s living standards squeeze.

He concludes:

For the future major benefit cuts for working families will dominate their living standards experience for the rest of this Parliament. Domestic policy matters. To fetishise globalisation as the cause of all our ills is to let too many domestic policy makers off the hook for decisions they make, for problems they leave unaddressed and for the lower incomes working people experience as a result.

For politicians shrug and say, ‘well that’s globalisation for you’ is not good enough.

The ‘triumph of neoliberalism’ is overstated

Neoliberalism isn’t a term I use very often as it is one that means a lot of different things to a lot of different people. However, every so often there is an article telling us that neoliberalism has ‘lifted millions out of poverty’. The problem with this is that most of those millions are in China so we could just as easily say that authoritarian state-capitalism has lifted millions out of poverty. Trying to generalise this success to a particular political or economic system misses the point. Trade liberalisation helped but the Chinese state organised itself to take full advantage. The reason rising incomes in China loom so large in the global statistics is because the country has one fifth of the world’s population.

So far the trick hasn’t been repeated by any other countries. The Resolution Foundation is not convinced that it will be.

We should note too that we cannot assume that historic trends will continue, something Milanovic himself warns us against. [57] Processes such as the o shoring of some manufacturing jobs from the UK or US to China may have already happened and be unrepeatable, and because of its remarkable growth China is no longer such a low paying nation. We do not know if India or sub-Saharan Africa will bene t from exporting, inward investment and rapid growth in the same way that China did, nor what impact global demographic trends will have. And new technologies may change the equation too, continuing to shift commerce into the digital realm while reducing the need for primary and manufacturing labour in both poorer and richer countries.

In other words, the phenomenal rise of China might be a one-off event brought about by a peculiar set of circumstances at a particular time. It doesn’t necessarily follow that other poorer countries will see similar income growth.

There is much more in this report, including some detailed discussion of UK incomes which needs a post all of its own. Altogether, though, if I had to sum up the report’s conclusions it is that the bogeyman of globalisation and its potential threat to our living standards has been exaggerated. Some of the causes of income stagnation and low wages in western countries are to be found much nearer home.

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Don’t write the left off yet

Does the left have a future?” asks John Harris, citing the changes in the nature of work (see previous post), political fragmentation and the rise of nationalists and the populist right as challenges to mainstream leftwing parties throughout the western world.

He says:

Labour is engulfed by the same crisis facing its sister parties in Europe. Political commentary tends to focus on politicians, and describe the world as if parties can be pulled here and there by the sheer will of powerful individuals. But Labour’s problems are systemic, rooted in the deepest structures of the economy and society. The left’s basic ideals of equality, solidarity and a protected public realm should be ageless. But everything on which it once built its strength has either disappeared, or is shrinking fast.

The western left faces three grave challenges, which strike at the heart of its historic sense of what it is and who it speaks for. First, traditional work – and the left’s sacred notion of “the worker” – is fading, as people struggle through a new era of temporary jobs and rising self-employment, which may soon be succeeded by a drastic new age of automation. Second, there is a new wave of opposition to globalisation, led by forces on the right, which emphasise place and belonging, and a mistrust of outsiders. And all the time, politics rapidly fragments, which leaves the idea that one single party or ideology can represent a majority of people looking like a relic. The 20th century, in other words, really is over. Whether the left can return to meaningful power in the 21st is a question currently surrounded by a profound sense of doubt.

It’s difficult to disagree with any of that. The Labour Party is in dire straits at the moment and many other social democratic parties are not faring that much better. But is the rise of populism in Europe only a problem for left-wing parties or could it present challenges for the mainstream right as well? And does the term ‘right-wing’ adequately describe Europe’s populist movements?

Let’s take the EU referendum as a starting point. It tends to be seen as a victory for the populist right but the Brexit vote is the most anti-business poll result we have had in Britain for over 40 years. No vote since the election of Harold Wilson in 1974 can have caused so much dismay in corporate boardrooms. Companies find themselves having to set aside money to do things they hadn’t expected, like changing their supply chains, relocating staff and trying to understand and anticipate the new  regulatory environment. Potentially being shut out of the single market, thereby losing access to customers and a ready supply of skilled workers, will severely hit their profits over the next few years. When it comes to sticking it to the bosses, then, the vote to leave the EU was the most anti-capitalist thing the British have done since they voted for nationalisation in the post-war period.

The Brexit vote was, at least in part, a re-assertion of old workerist ideas; protect the British worker from foreign competition, foreign workers and globalisation. It certainly wasn’t a vote for a smaller state. The sheer complexity of disentangling the UK from the EU and setting up new trade agreements will require an army of lawyers and civil servants. Even when these are in place, there will need to be a bureaucracy to maintain them. Immigration controls, too, need to be policed. The tougher they are, the more control will be needed.

There is a strong correlation between Brexit voting and authoritarian attitudes. Brexit voters tend to want harsher punishments and longer sentences, all of which implies more public spending, both to catch and punish the offenders. It is also likely that most are in favour of re-nationalising the public utilities.

Surveys of UKIP voters have found attitudes we usually associate with the right, like wanting tougher sentences and more discipline in schools, but also with the left, like support for re-nationalisation and the NHS, distrust of big business and the belief that wealth is not fairly distributed. As the British Social Attitudes Survey commented:

It seems that on this central issue of political debate in Britain, UKIP supporters are far from being on the right.

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Similar attitudes can be found in other populist movements in Europe and among Donald Trump’s supporters in the USA. A combination of economically left-wing and culturally right-wing views, diametrically opposed to the prevailing political climate over the past three decades during which, as Alan Wolfe said, “The right won the economic war and the left won the cultural war.”

The thing is, though, this is not a new kind of politics. It’s an old one. My grandfather, a former soldier, miner and trade union activist, would not have found any of this at all strange. He was a socialist who believed in workers’ rights, nationalisation and the welfare state, while having a low opinion of those who simply ‘shirked’ and a mistrust of foreigners that I would not describe as racist but more as a mild xenophobia. What he would have made of gay marriage is anybody’s guess. Such things were not discussed. But Grandad would have no truck with ‘blackshirts’ as he still called the far-right. No party led by former fascists and racist street fighters would ever have got his vote. Many people still hold this combination of left-wing economic views and right-wing social attitudes. No-one would have questioned Bob Crow’s credentials as a left-winger yet he was in favour of capital punishment.

As it pushed its socially liberal agenda forward, the Labour Party failed to take many of its voters with it. As it emphasised its social liberalism and toned down its socialist policies, many voters began to wonder whether it still represented them.

The only reason parties like the National Front and BNP made no headway was because, like my grandfather, most voters would have no truck with such people. Every so often, a party of the far-right would try to make itself ‘respectable’ by swapping boots for suits but no-one was fooled. Then along came UKIP, the first populist right-wing group not to be founded by former leaders of racist or fascist groups and one which didn’t go in for marches and violent confrontation. It started out as a party of the libertarian right and it still describes itself as such but these days there is almost nothing libertarian about it.

There were hoots of derision from the left when James Peterson, a UKIP candidate in South Wales, described himself as “very left-wing” and UKIP as “the truly left-wing party” but looking at its policies on the NHS, the minimum wage, workers rights and the scrapping of the bedroom tax, there is plenty there to attract traditional Labour voters. More importantly, the prevailing attitudes among its target voters suggest that the party may need to shift further to the left on economic issues. As the New Statesman said, the departure of Nigel Farage may open the way for Red UKIP, which could present a serious of a challenge to Labour in places like south Wales.

All good news for the Conservatives then? Well maybe not. Both our major political parties fused different and potentially contradictory sets of attitudes together in electoral coalitions that were remarkably long-lived. The Labour Party was an alliance between socialism and social liberal progressivism while the Conservative Party brought together traditionalism, social conservatism and free market economic liberalism. Just as Labour’s social progressives won out, so did the Conservatives’ free marketeers, in what David Goodhart called the triumph of the two liberalisms, the social liberalism of the left and the economic liberalism of the right. Some of the traditional conservative voters were not at all happy with the outcome of the liberalised world.

Ed West criticised the Tories for being right-wing about the wrong things:

What is it with the Conservatives? They seem to be Right-wing only where no one wants them to be Right-wing. Theirs is a conservatism that cares nothing about British sovereignty, marriage, natural justice, defending the borders, law and order or the armed forces, but that cares deeply about reducing the rights of British workers. Contrary to the idea banded about in the less thoughtful areas of political discourse, conservatism is not about protecting the rich: it is about creating an environment that is safe, sober, crime-free, respectful, educated, gentle and high in social capital and trust. In other words, about protecting the poor and weak. Until the Conservative Party realises this, they will continue to haemorrhage support.

Peter Hitchens thinks that Thatcherism ruined Britain and that “Neoliberal free market Thatcherism is the enemy of conservatism.” You’d be pushed to find many Conservatives who would criticise Margaret Thatcher quite so bluntly but many are uneasy about the way things have turned out. They would no doubt share his opinion that the Conservative Party let “the roar of commerce” blast away communities, Christianity, marriage and the family while doing “little or nothing to reverse the demoralization brought about in the 1960s”.

Some of these disgruntled Tories shared the concerns of socially conservative Labour voters and, like them, defected to UKIP.

John Harris fears the ascendency of a new right, epitomised by the Britannia Unchained authors Kwasi Kwarteng, Priti Patel, Dominic Raab, Chris Skidmore and Elizabeth Truss. But the populist right is a very different sort of right from that of Raab & Co. Most of those who voted Brexit would be unlikely to go for their vision of a deregulated and Uberised economy. After all, these are the politicians who called British workers lazy. That’s not likely to go down well on Teesside. They are, as Ed West might put it, the wrong sort of right. UKIP understands this, hence its emphasis on workers’ rights.

So, it seems, does Theresa May. As Chris Dillow said, her speech about workers being exploited by unscrupulous bosses, the unhealthy gap between employees’ and bosses’ pay, the clampdown on tax dodgers and the proposal to put workers on boards made her sound a bit like a Labour prime minister. Despite some pressure from employers, she plans to go ahead with the increases in the minimum wage. Appealing to both traditional Tories and many Labour voters, she has promised of a big reduction in immigration.

The Conservative Party, then, may look like a beneficiary of the post-Brexit policies but, like Labour, it has to manage its internal contradictions. A lot of its business supporters are even more worried about restrictions on immigration than they are about the minimum wage. And, while most are resigned to leaving the EU, they are aghast at the prospect of leaving the single market. It will be almost impossible to please everybody. At best, some Tory voters will be disappointed, at worst, all will be outraged.

Aside from the almost inevitable Tory troubles, there are other reasons why the left should not despair. Although Europe is experiencing a socially conservative populist backlash, studies of social attitudes in the UK suggest that things are moving in the opposite direction. We have now reached the point where the Labour social legislation of the 1960s has majority support. Most people are now OK with gay marriage and gender equality. Social conservatism is in a gradual decline, especially among younger voters. Even the death penalty no longer enjoys majority support.

At the same time, there is no appetite for the sort of state-shrinkage advocated by some on the right. There never has been. Public attitudes oscillate between wanting more taxation and spending and keeping it the same. At the moment, the pendulum seems to be swinging back towards higher spending.

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Chart by British Social Attitudes Survey

That UKIP is having to adopt more left-wing policies to steal Labour votes should also give some comfort to the left. The idea of a right-wing free-market government dismantling the state, ripping up regulation and shredding employment laws is a fantasy shared by left-wingers and the libertarian right but it’s not going to happen. In its report on post-Brexit Britain, Open Europe said that a bonfire of red-tape would be unlikely as it would not be ‘politically feasible’ to scrap all regulation currently associated with the EU. That’s another way of saying that the voters wouldn’t stand for it. Some regulations are actually quite popular.

All in all, then, there is still quite a lot of support for things that the left holds dear. The one area where the left is most out of step with public opinion is immigration. As a recent Migration Observatory report said, most people think immigration should be reduced.

screen-shot-2016-09-09-at-18-01-28Even so, as an Ipsos MORI survey found, although many people think immigration is a national problem, most don’t see it as an issue in their local area.

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It’s almost as though people think that, somewhere out there, there is a mass of migrants taking people’s jobs, scrounging benefits and putting pressure on public services, even though they haven’t actually witnessed such things themselves. There must, then, be some scope for the left to fight back even on its most vulnerable flank.

This is all a very long way of saying that I don’t believe the political, social and economic changes are as stacked against the left as John Harris does. He is right that the old parties of the mainstream left will have to change but so will those of the mainstream right. He is also right to point out that the response of left-wing parties and trade unions to changes in the labour market have been inadequate but the discussion of that will require a post of its own. But to suggest that the left is doomed because we are moving inexorably into some new right-wing zeitgeist seems a bit premature. A lot of what the left has stood for in the past is still quite popular with a lot of voters.

A decade ago, people were talking about the death of the Conservative Party. That seems absurd now. Likewise, it’s a bit soon to be talking about the death of the left. It, too, will make a comeback. At some point, something will emerge from the current chaos that is capable of winning an election and throwing what looks like an unassailable government out of office. It always does in the end.

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We are not all temps and freelancers yet

John Harris has written a long piece in the Guardian asking, “Does the left have a future?” It’s an excellent read and I will write a longer piece on it soon. But, on the subject of changes in the labour market, he said this:

One in seven Britons is now self-employed. In the US, Forbes magazine has predicted that by 2020, 50% of people will at least partly work on a freelance basis. In 2015, the Organisation for Economic Cooperation and Development reported that since 1995, “non-standard” jobs – which is to say, temporary, part-time or self-employed positions – accounted for the whole of net jobs growth in the UK since 1995.

While the first sentence is true, the rest of the paragraph is at best misleading and at worst total nonsense. It’s not the first time I have seen these factoids and it probably won’t be the last.

The “50% of Americans will be freelancers by 2020” meme just refuses to die, despite numerous stakes having been driven through its heart by US labour economists. Some of these large figures are based on a survey that used a very wide definition of gig economy workers, which included what we in the UK would call part-timers, temporary workers, agency workers and those on zero-hours contracts, and which was carried out in the depths of a recession when full-time jobs were at their lowest. As Bloomberg’s Justin Fox said, if you take out standard part-time workers, even the most generous definition of freelancers still only gets you to around one in five workers, down from a recession peak of just below 22 percent.

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Most of the US data show similar trends. The number of people with multiple jobs has fallen, as have the proportions of involuntary part-time workers, contract workers and workers in businesses with 1-4 employees. Compared to other developed economies, full-time employment in America is relatively high and, after falling during the recession, increased again as the economy recovered.

It is true that a survey by the Freelancers’ Union found that a third of Americans gain some of their income from doing some form of freelance work but that proportion hasn’t increased by much in recent years. Furthermore, the definition used was so broad that it included people whose income from freelancing wasn’t even enough to be taxable. In other words, it captured anyone who had done a bit of work in their spare time or sold a few things on eBay. Some people are using online platforms to supplement their income and this number will no doubt increase. But to suggest that this represents a major shift towards freelance work in the US labour market is something of an exaggeration.

If the statement about the US economy is misleading, the one about the UK is just plain wrong. Even so, like its American counterpart, it too crops up all over the place. Apparently, data from the OECD suggest that all the job growth in the UK over the past 20 years has been in non-standard work, meaning part-time, temporary or self-employment. But the only OECD data I could find, from this report in May 2015, say that there has been very little change in the proportion of non-standard workers in the UK. There has been an increase since the 1980s but almost none over the last twenty years.

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In fact, as Michael O’Connor pointed out, most of the change in employment since 1995 has come from full-time employee jobs.

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It is true that around half of the employment growth since the recession has been due to part-time and self-employment and that the growth in full-time employee jobs took much longer to get going. As a consequence the proportion of workers in full-time employee jobs has fallen slightly but it is still over 60 percent.

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 Source: ONS Employment Statistics, 17 August 2016.

Of those of us in work, then, 3 in 5 are in full-time employee jobs. That’s not to say there haven’t been shifts in the labour market that have made things difficult for some people. Even for those in full-time employment, job protection, from both unions and the law, isn’t as strong as it once was. There has also been a pay squeeze and an increase in low-paid zero hours work and self-employment. The job recovery in some parts of the country is still looking precarious.

Of course there have been changes in the labour market both here and in the USA but it is important to keep such things in perspective. If the number of freelancers in the US really were nearing 50 percent and if all the job growth in the UK really had been due to part-time and self-employment, both governments would be facing fiscal crises far worse than their current ones. These shifts in the nature of work present challenges for the left and for trade unions as well as for governments and for people trying to find secure work. There is no need to over-state the case with wild and spurious numbers though. Things are difficult enough as it is.

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Immigration and the ‘left behind’

Statsmeister Michael O’Connor produced this gem of a chart a few weeks ago, breaking down the post-recession employment recovery by region, type of employment and country of birth. It shows how much of the job growth outside London has come from self-employment, especially for those born in the UK. Even now, there are still fewer people in employee jobs in Yorkshire and Humberside than there were before the recession. Among the UK-born, there are fewer people in employee jobs in Yorkshire, the Midlands, Scotland and, most surprisingly, the South-East.

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Some of this might be due to demographic change. The population of working age UK-born has fallen in some areas. But that wouldn’t explain why there has also been a growth in self-employment among the UK-born. If it were simply a case of there being fewer of them, surely the number of self-employed would fall too.

Mobility, and the lack of it, provides some explanation for these patterns. In any society, people in their twenties and early thirties, without children, tend to be the most mobile. They are free to travel for work and happy to live in relatively basic accommodation. After all, it won’t be for long and the money and experience will set them up for a (hopefully) more stable future.

The effect of free movement of labour throughout the EU has been to gather all these people, across Europe, into a single labour pool. It is a pool in which British employers have found it easy to fish. With English being the most popular second language in Europe and wages in the UK being relatively high, it was inevitable that a lot of these people would be attracted to the UK. As a Centre for Population Change report published earlier this year showed, the proportion of people in their twenties and thirties is much higher among EU migrants than among the UK-born population

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These are the people who can move most freely across the continent, making them highly responsive to the demand for labour. (More on this in last week’s post.)

Many of the UK-born population find it difficult to do some of the jobs current filled by migrants. It’s not because they are lazy it is simply that the sort of flexibility the migrants provide, and employers have come to expect, is hard to maintain when you have a home and a family. As Sarah O’Connor said:

When people say “migrants are doing the jobs that Brits are too lazy to do”, they are missing the point. These jobs may be palatable if you are a single person who has come to the UK to earn money as a stepping stone to a better future. But if you live here permanently, have children here, claim benefits here, they are not jobs on which you can easily build a life.

James Gleeson produced an interesting chart earlier this week showing how the geographical centre of gravity for jobs has shifted further south over the past decade or so, while the people and, especially, the housing have lagged behind. (He explains the methodology behind it here.)

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To a certain extent, then, people are following the work but many are, for obvious reasons, staying where their families and accommodation are.

Recent research by the Joseph Rowntree Foundation suggests that there is a similar problem in microcosm in many of the large cities. The prosperity of the shiny new city centres in Manchester, Leeds and Birmingham does not flow to the areas round about. This doughnut problem sees unemployment and underemployment in the periphery of major cities existing alongside unfilled jobs in the city centres. A mixture of skills mismatches and poor transport disconnects suburbs and small towns from the employment opportunities in the cities close by.

Perhaps this explains some of the rise in self-employment among the UK born in the Midlands and North. In the absence of new local jobs, people have set up their own businesses. The trouble is, as Paul Nightingale and Alex Coad point out, a lot of these businesses are likely to be marginal, lacking the capacity even to provide a minimum wage income for their owners. The vast majority of businesses set up in recent years have turnover below the VAT threshold and the incomes of the self-employed have collapsed since the recession. Even so, subsistence-level self-employment is preferable to no employment at all.

This raises another question though. If we hadn’t had free movement of labour and a young mobile workforce on tap, would the labour shortage have forced employers to train more people and to move to areas where they could find workers? Might they have had to put a bit more effort into using the workers we already had available in the UK? Or might it simply be that, without the ready supply of migrant labour, a lot of the jobs and a lot of the companies that have appeared since the recession would simply not exist?

The end of free movement of labour probably won’t make us any the wiser. The effects will be dwarfed by the economic downturn. As Jonathan Portes notes, there are already signs that the weakening UK economy is making the country look less attractive to migrants. The Resolution Foundation points out that, even if annual migration is cut to below 100,000, any increase in wages brought about by the resulting labour shortage is likely to be cancelled out. The pay squeeze caused by the economic shock of Brexit will obliterate any gains.

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Their report showed that, while immigration does create some downward pressure on pay, it is nothing compared to the effects of an economic slowdown. Recessions hit people’s pay packets much harder than migrants do.

The next recovery will be different from the last one. Recessions and recoveries always are. Whether the absence of free movement of labour from the EU will make much difference to the overall pattern of job growth is difficult to say. Without concerted effort from government and employers on infrastructure, training and technology, it looks unlikely that much will change. Without that, Brexit or otherwise, the workless, the underemployed and those in precarious jobs probably won’t see much improvement.

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Are we prepared for post-Polish Britain?

The HR director at an organisation I worked with a few years ago, commenting on people’s refusal to engage with change until the last minute, said: “When a decision is announced in this place it’s a signal for the debate to start.”

I was reminded of this when I read Heather Rolfe’s report on employer responses to Brexit, in which a number of employers commented that there had been more workplace discussion of the referendum since it happened than there was before it:

While referendum discussions were described as fairly limited before the vote, levels of interest were considerably higher after June 23rd. The surprise of employers was shared by employees and accompanied by a good deal of informal discussion, often focused on free movement issues. The manager of a hotel chain described how this included ‘concern around whether the people are wanted in the UK’. Some respondents felt it was ironic that interest in the referendum and in the EU was higher in the aftermath of the vote. The HR director of a food manufacturer stated:

‘My disappointment from people generally is if there’d been that level of discussion and engagement prior to the Referendum… perhaps the outcome might have been different’.

The shock among the employers surveyed is a reflection of how dependent they are on workers from the EU. The possibility of a reduction in their labour supply fills them with horror.

For over a decade, the UK economy has been built on the assumption that there is a massive pool of flexible labour available. Free movement rules and geographical proximity mean that the EU migrant workforce is highly responsive to changes in the economy. People come and go according to how many jobs are available. As the ONS migration statistics show, migration from the EU tailed off during the recession and then picked up again as the economy recovered.

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At the same time, many of the EU migrants already here went home (or somewhere else) when the economy crashed and the work dried up.

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While these charts only cover migration of more than a year, we also know, thanks to Michael O’Connor and Jonathan Portes, that there is a considerable churn of short-term migrants from the EU. The difference between long-term migrants and the number of NI allocations shows that a lot of people come to the UK to work for short periods.

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Chart via Guardian

As the Resolution Foundation’s recent report on migration and the labour market showed, the employment rate among EU migrants has tended to be higher than for the UK born, and is especially high for those from eastern Europe. Furthermore, their employment rate recovered more quickly after the recession. This is due, in part, to their mobility. When there is more work, more of them come. When there is less work, fewer come and more leave.

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From an employer’s point of view this is great. There is a ready supply of labour, much of it highly qualified, that responds quickly to changes in demand. When you want more people they arrive. When you don’t need them any more they go home.

Around half of the net increase in employment since the recession has been due to EU migration.

Emp Chg country of birth Aug 2016

Source: ONS EMP06, 17 August 2016

It is disingenuous of politicians to boast about the ‘jobs miracle’ while, at the same time, demanding a reduction in immigration to under 100,000. Many of these jobs would probably not exist without the ready supply of EU migrants. As the Resolution Foundation research shows, entire sectors are now dependent on labour from the EU and it is unlikely that UK-born workers will take these jobs over should they leave.

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It is unlikely that native workers will totally fill the gap at current wage rates. Pay in these sectors averages £9.32 an hour, significantly below average native wages of £11.09. We know that lots of workers in these sectors are migrants from the EU ‘accession’ countries, whose average earnings are £8.33, £2.76 below that of natives. With employment at an all-time high it is unlikely that there are large numbers of natives either looking for work that will be attracted to these sectors given the low-wages on offer. Similarly these kind of wage rates are currently not sufficient to bring those not in the labour market into participation. It seems unlikely that the simple absence of migrants would be enough to change that situation.

Sarah O’Connor wrote about the potential impact of the end of free movement on the food industry:

Have you ever noticed how supermarkets run out of fruit salads on sunny days when everyone decides they fancy a picnic? No? That’s because they rarely do.

I never really thought about the mechanics behind this until I interviewed a man who supplied temp workers to a British company that made bagged salads and fruit pots. Demand would fluctuate according to the weather, but British weather is notoriously changeable and fresh products have a short shelf life. So the company would only finalise its order for the number of temps it required for the night shift at 4pm on the day. Workers on standby would receive text messages: “you’re on for tonight” or “you’re off”.

Most of this hyper-flexible workforce had come to the UK from Europe. “We wouldn’t eat without eastern Europeans,” the man from the temp agency said confidently.

And there are many good reasons why the locals won’t take over when they are gone.

[T]here are already plenty of jobs for British people. The proportion of UK nationals in work is at a near-record 74.4 per cent, higher than in 2004 when the “A8” eastern European countries joined the EU (which is when migration to the UK began to increase sharply). Torsten Bell, director of the Resolution Foundation think-tank, says the only significant pocket of unemployment left in Britain is among disabled people. “And we’re not about to send them out into the fields”.

There is also something about the nature of these jobs that makes them tough for UK nationals to do. These sectors usually require extreme flexibility from staff: the salad-baggers who wait for a text message to say they have work that night; the cleaners who cobble together piecemeal shifts at dusk and dawn; the fruit pickers living in caravans on farms.

When people say “migrants are doing the jobs that Brits are too lazy to do”, they are missing the point. These jobs may be palatable if you are a single person who has come to the UK to earn money as a stepping stone to a better future. But if you live here permanently, have children here, claim benefits here, they are not jobs on which you can easily build a life.

There you have it. British employers have access to a plentiful supply of Europe’s young, mobile and hyper-flexible employees. We have structured many sectors of our economy on the assumption that there will always be a steady stream of them.

Of course, the supply won’t disappear overnight. As the Social Market Foundation said, by the time we actually leave the EU, a majority of the EU migrants who are already here will have permanent residency rights.

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But, as the tap is turned off, the hyper flexibility will disappear. If, in future, EU citizens are subject to the same immigration rules as those from outside the EU, firms that have come to rely on that flexibility will struggle to find workers.

An optimistic view is that this may lead to more investment in technology and training as employers find ways to produce the same with fewer people. Last month, I went to a Resolution Foundation conference on robotics. (The accompanying report is here.) The combination of economists and robotics experts produced some fascinating discussion. One scenario had the post-Brexit labour shortage kick-starting massive investment in technology, with robots picking crops in the Lincolnshire fields and the UK becoming a world leader in artificial intelligence by 2030.

The trouble is, such a re-orientation of our economy would require a complete change in British corporate culture, much of which has been short-termist and reluctant to invest for several decades. The more troubling possibility is that the reduction in EU migration will simply lead to an increase in the number of illegal workers. Should that happen the enforcement agencies would struggle. As the Resolution Foundation warns, their resources are already stretched as it is:

[T]he three existing labour enforcement units have a combined staff of less than 350 – equivalent to one enforcement officer for every 20,000 working age migrants.

These agencies could be given responsibility for enforcing and policing any temporary workers schemes that might be set up in the future, but they are already stretched carrying out their current duties. If temporary labour migration is not to become illegal migration there would need to be significant investment in the future.

Cutting off or even significantly reducing migration from the EU will be a shock to an economy that has been built on the assumption of a plentiful on-tap supply labour. As Sarah said, we have come to take for granted much of the work that the migrants do. We will only really we’ll only really understand that when they have gone.

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There will be no post-Brexit dividend

I was invited onto Tom Swarbrick’s show on Saturday to comment on Brexit and, particularly, the chancellor’s pledge to maintain the EU spending on agriculture and some scientific projects. As I said on the programme, and as several other people have pointed out, this isn’t really a big deal. The funding is only guaranteed until 2020 and as it is unlikely that the UK will be out of the EU until 2019, this only amounts to one year’s funding.

There is a wider issue here though. As one commenter later in the programme put it, leaving the EU is like trying to take the stripes out of toothpaste. The EU economy is integrated and rests on a set of assumptions built up over 23 years of the single market. Supply chains stretch across Europe. Businesses have been built on the basis that goods, services and workers can move freely.

Last week, the Institute for Fiscal Studies published a report on the likely impact of the various Brexit scenarios on UK trade. It focused on the important distinction between membership of and access to the single market, making the point that once the UK leaves the single market, trade becomes a lot more expensive and bureaucratic, mainly due to non-tariff barriers. (For more on this see Ben Kelly’s piece.) The impact on trade will, says the IFS, have a knock on effect on the public finances through reduced tax revenues and increased welfare payments “as higher-than-expected unemployment – and prevalence of low incomes – pushes up spending on working- age benefits and tax credits.”

This will blow a huge hole in the budget. The IFS estimates that the public finances will be between £24 billion and £39 billion a year worse off by 2020. It was already going to be extremely difficult for the government to eliminate the public deficit by the end of the decade. Brexit will make it impossible, which is why Theresa May has abandoned the idea.

Set against this, the amount the UK will save by not contributing to the EU is puny. An IFS report in May calculated the likely net contribution over the next few years at around £8 billion a year. Once you allow for the rebate and EU spending on the UK, the much-trumpeted £350 million a week is reduced by more than half.

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This will be completely obliterated by the hit to the public finances, which will dwarf it by three to four times.  On top of that, there will be extra pressure on the public purse, not least from the increase in the size of the civil service that will be necessary just to deal with what the Economist called “bureaucratic marathon” of Brexit.

The upshot of this is that there will be no extra money from leaving the EU. It will be eaten up by the cost of Brexit. The cost of guaranteeing funds for farmers and research projects will therefore either have to be met by taking funds from somewhere else or by increased taxation and borrowing.

The chancellor’s pledge to maintain funding would need to be renewed after 2020 and could therefore become an issue at the next election. Do you want to maintain the support for farmers and for other former EU funding recipients like Wales and Cornwall? If so, should we take that money from the NHS or schools or defence? Or would you rather pay extra tax or have the government borrow more? Those are the options. There is no Brexit dividend. Our EU refund has disappeared into the vortex of the post-Brexit slump.

It will be interesting to see what the voters decide.

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Brexit: Enough David Brent, this is serious!

A few years ago, I was listening to a talk by a coach and motivational speaker who was extolling the virtues of positive thinking and the new empowered, non-hierarchical, collaborative workplace. I said that, while I loved his wonderful image of the future of work, I didn’t see much evidence of a trend in that direction. We had been talking about these things for twenty years, yet command and control was still the norm in many industries and technology was making some workplaces more regimented than ever. Not to mention the people on various forms of precarious contract at the whim of their managers.

His response was that, by choosing to focus on such things, I was displaying my negative mind-set. I was filtering information according to my preconceived ideas and refusing to allow in the positive and hopeful future. See what he did there? He turned his complete lack of supporting evidence for what he was saying into my problem. It was me being negative, not him ignoring the data.

Alas, the cod-psychology of self-help and motivational mumbo-jumbo has seeped into the Brexit debate. Leave campaigners are telling anyone who raises concerns about Brexit to ‘be positive’, ‘just get on with it’ and, my personal favourite, ‘move on’. It’s the sort of language adopted by managers who want to railroad a project through and don’t want to hear the staff tell them it might go wrong.

But just get on with what? Move on to what? I’m as happy as the next person to move on if it’s clear what we are moving on to but, at the moment, we have no idea. We might have voted against the EU but what did we vote for? The government should have had a plan, say the Brexit campaigners. (There it is again; turn your own failings into someone else’s problem.) But it is difficult to see how anyone could have planned for this, especially when we don’t know what ‘this’ is. “Brexit means Brexit,” said Theresa May, which sounds decisive but is anything but because Brexit can mean all sorts of things.

I have managed any number of change programmes over the years, consisting of multiple but mutually dependent projects. When I look at this, though, I wouldn’t even know where to start. I tried to draw a diagram of the various options but I gave up because each one of them has so many potential permutations and stumbling blocks, each dependent, in turn, on the political pressures on many different actors.

Just deciding the UK’s starting position is going to be difficult enough. Most business groups are adamant that the UK should retain its membership of the single market while a lot of those who voted Leave did so on the assumption that, after Brexit, free movement of people from the EU would stop. At the moment, EU governments and, perhaps more importantly, their voters, are very reluctant to offer the UK a deal that allows both.

Eurotrack EU trade-01

The next diagram* shows the various relationships that different countries have with the EU. Broadly speaking, the further right you go, the more control you have over things like regulation and immigration but the less favourable the trade terms get. Switzerland, for example, is being threatened with reduced market access if it goes ahead with its plans to restrict immigration from the EU. Beyond the red circle, you leave the EU orbit altogether and either negotiate free trade agreements with the EU or trade under WTO rules. (More on this later.)

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We start from the point, then, that there is no consensus in the UK about what Brexit should look like. Going into a negotiation without knowing what you want and hoping it will become clear as you go along is really not a good place to start. Ideally, to satisfy everyone, we would need to have Norway’s single market rules and Canada’s right to restrict migration from the EU. It is very unlikely that other EU countries would agree to that.

Even if we can agree a starting point which a majority of people in the UK might accept and which would not trash our economy, the negotiations are likely to drag on for some time.

As Bloomberg reported earlier this week, each EU country is drawing up a shopping list of the things it wants and doesn’t want from Brexit. Some positions are defensive, others are looking at exploiting the opportunity, such as Luxembourg going after London’s financial trade and Spain grabbing Gibraltar. Against this background, just agreeing an EU-wide position will be difficult enough and it is something over which the UK has very little control. There will be negotiations nested within horse-trading nested within more negotiations.

Then there are the negotiations with those outside the EU to consider. The UK will have to re-negotiate its membership of the World Trade Organisation. Again, this could be subject to a veto from any one of the other countries. The head of the WTO has warned that such talks are likely to be long and tortuous. And all this before any bilateral trade deals can be agreed.

The simplest option would be to leave the EU and remain part of the European Economic Area (EEA). The plug-in-and-play option is always worth considering when planning any major change. The consequences of leaving the single market (as opposed to leaving the EU) were not really discussed during the referendum. This piece by Ben Kelly, a pro-Leave campaigner advocating the EEA option, goes into some of the detail. It’s not just tariffs that are the problem, he says, it’s the non-tariff barriers too.

At the moment, all goods produced in the UK are assumed to be compliant with EU rules. That is the point of the single market and all that horrid EU regulation. But the moment we leave the EU, we will no longer be part of that single market so our goods will be produced outside the regulatory area. Once the UK leaves the EU, therefore, the EU will have to start inspecting all UK exports in the same way it would goods from any other country. As Ben Kelly explains:

The great benefit of the Single Market is that border checks have been eliminated; facilitating free trade. The common rules are monitored by relevant national authorities and there is mutual recognition of standards. This makes it possible to load a lorry in Glasgow and ship goods all the way to the Turkish border with little more than occasional document checks.

If we leave the EU and the Single Market without negotiating an agreement to replicate these benefits, this all stops. The exported goods may still comply with exactly the same standards, but the testing houses and the regulatory agencies are no longer recognised. Thus, the consignment has no valid paperwork and is subject to border checks, visual inspection and physical testing.

In practice this mean the shipment is detained while samples are taken to be sent to an approved testing house. With a container inspection costing approximately £700, and detention costs running to around £80 a day for ten days or so it takes to get the results back, plus a testing fee, exporters are paying over £2000 just to deliver a container to an EU Member State.

This would have serious economic consequences. The delays would be devastating. Supply chains across European industry are integrated, with many working on a “just in time” regime. This means that any delays even to a small number of consignments will have an adverse effect on the whole system.

So the ‘just get on with it and leave’ option would be extremely dangerous. If we found ourselves outside the EU without a trade agreement we would be in big trouble. Advocates of the WTO Option, the default of simply leaving the EU without any agreements, claim that the US, China and Australia have no trade agreements with the EU yet freely trade with it. But all these countries do have agreements with the EU on regulation. These Mutual Recongition Agreements (MRA) recognise each other’s regulatory standards thereby reducing the amount of inspection needed at borders and simplifying customs procedures. Regulatory regimes are a bit like traffic lights and road markings. They help things move more quickly. If you got rid of road rules, traffic would grind to a halt. If the UK quit the EU’s regulatory framework without negotiating a MRA, something similar would happen to our trade with the rest of Europe.

Even the EEA option would not be without its problems though. We would be left with similar rules on free movement, which a lot of Leave voters would see as a betrayal, and there is no guarantee that the other countries involved would agree to it anyway. As constitutional law professor Michael Dougan says, there are 32 potential vetoes over the UK’s membership of the EEA; the 27 other EU countries, the 4 EEA countries and the European Parliament. Norway is already threatening to block the UK’s EEA membership.

There really are no easy answers here. The idea that we can just walk away from the EU is utter nonsense but all the other options are complex. The length of time they will take and the resources needed to bring them to a conclusion are impossible to forecast.

Which brings us to the final piece of the problem – resources. As anyone who has ever run a major project will know, being clear on the objectives, tasks, dependencies and sequencing is only half the battle. You then have to secure the resources to do it.

In another announcement that barely made the news, National Audit Office boss Sir Amyas Morse warned that the government doesn’t have the spare capacity to carry out all the extra work that leaving the EU will bring. This, he said, is not just a matter of capability:

We will have set civil servants a Herculean task and set them up to fail. And none of us can afford that.

Please don’t misunderstand me, I am not joining the clamour pointing to our lack skills in trade negotiation.

My point goes further. If that were the only issue, we’d be relatively well placed!

Brexit, he concluded, will have to be prioritised with consequences for all other major government projects. In short, without a significant increase in the size of the civil service, just about everything else will have to be scrapped.

With no clear objectives, an incalculable number of dependencies, unfathomable sequencing, timescales impossible even to guesstimate and depleted resources, any project planner might be forgiven for throwing in the towel. Some sort of plan will emerge eventually but, at the moment, just making one for the project’s first phase, defining what the hell it is we want, is going to be difficult enough.

So spare me the pseudo psychology and the David Brent-isms. Trite phrases like ‘move on’, ‘be positive’, ‘just do it’ and ‘we are where we are’ reflect a failure to understand the magnitude of the Brexit task. There’s no ‘just’ about any of this. It is a colossal and eye-wateringly complex task. It will take years and will dominate UK politics for the rest of the decade.

*Update

The chart above is not a Venn diagram. It is simply an illustration of the levels of trade integration with the EU but, as some people have remarked, it simplifies the nuances of the countries relationships with the EU. The EU is not a subset of EFTA and EFTA is not a subset of the Customs Union.

This one from a recent EFTA report (which is an interesting read) shows the varying relationships and agreements between European countries, including those that are not related to trade. Turkey, for example, is a member of the Customs Union but not of the EEA. Norway is a member of the EEA without being in the Customs Union.

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There is a discussion of the pros and cons of each option in this FCO report from earlier this year. The Institute for Government has a useful one-page explainer.

At the moment there is no provision for countries to become part of the European Economic Area without either being in the EU or EFTA, as this useful FAQ page on the EFTA website says. As some people have pointed out, it would, at least in theory, be possible for the UK to negotiate a similar arrangement without being an EFTA member and to lob in some restrictions on immigration too. It looks unlikely, given current political and public opinion in the EU, that there would be much support for such a deal.

Confused? You will be… and this will all drag on for some time.

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