When trying to increase your pay was dangerous

Andy Haldane’s speech in Bradford this week made headlines because of his comments about interest rates but what he said about stagnating wages is much more interesting.

He looked at the evolution of the Phillips curve, which shows the relationship between wage inflation and unemployment. In what we used to think of as normal times, if unemployment went up, wages fell. As demand for labour picked up, the reverse happened  because employers had to pay more to attract people from a shrinking pool of labour. Worker bargaining power increased as unemployment fell and reduced as it rose.

At least, that’s what used to happen. As Mr Haldane said, somewhat mischievously:

Historically, there has been a reasonably strong and stable relationship between unemployment and wage growth – the so-called Phillips curve. As unemployment has fallen recently, this Phillips curve relationship would have led us to expect wage growth to pick up. That, plainly, has not happened. Over recent years, the Phillips curve relationship has been anything but strong and stable (Chart 3).

In the last couple of decades, and especially since the recession, the unemployment rate doesn’t seem to have had much impact on wages at all. Whatever else has happened, pay has stagnated.

Something similar, seems to have happened before the industrial revolution. The data we have available seem to indicate that there was a long period before the industrial revolution when there was little wage inflation and not much of a link between pay and unemployment. The Phillips curve for this period was also flat.

Chart 11 plots UK Phillips curves over three periods: 1500-1700 (pre-Industrial Revolution); 1860-1950 (post-Industrial Revolution); 1950-1977 and 1977 to date (post-war period). In each case, wage inflation is measured on the y-axis and an estimate of the output gap on the x-axis. In the post-war period, the Phillips curve conforms to type. Since 1950, it has a clearly positive slope (less slack in the economy is associated with higher wage inflation) and an intercept which is positive (reflecting positive trend inflation).

The post-Industrial Revolution Phillips curve has a conventional upward slope, similar to that operating after 1950. Higher growth or lower unemployment is associated with higher rates of wage and price inflation. The pre-Industrial Revolution Phillips curve is altogether different; it is as flat as a pancake. Indeed, it bears a close resemblance to the Phillips curves which have operated, in the UK and globally, since 2008.

Could we be seeing a return to the power imbalances of the pre-industrial period? The pattern of the last few years, says Mr Haldane, looks remarkably similar to that of pre-industrial Britain:

The move towards greater self-employment and less unionisation is, in some respects, a shift back to the future in the nature of work. Prior to the Industrial Revolution, and indeed for some years after it, most workers were self-employed or worked in small businesses. There were no unions. Hours were flexible, depending on what work was needed to collect the crops, milk the cows or put bread on the table. Work was artisanal, task-based, divisible.

While the read-across to work patterns in the 21st century is far from exact, there are some parallels. That being the case, one question is how wage- and price-setting behaviour operated during this earlier period of more “divisible” labour markets. Were any of today’s wage patterns evident then? The data we have on wages and output in earlier centuries are partial and imperfect, but nonetheless tell an interesting story.

The difficulty he identifies in comparing today’s work patterns with those of the 18th and 19th centuries may go some way to answering his question. As Simon Deakin said, employment contracts are a 20th century development. Our forebears would not have understood work relationships in the same terms. From the 16th century until 1875, employment was governed by master and servant law. The feudal idea that workers were bound to their masters was a long time dying.

In today’s language, probably the best way of understanding employment under master and servant law is as a series of fixed-term contracts. These could vary in length and often started and finished on quarter days. In theory, they gave a measure of security to workers who would at least know that they had a job until Michaelmas. In practice, as Professor Deakin explains, the courts often found that, while the worker was bound to the employer, the employer was not bound to provide work or wages:

The employer was found to have an implied right to lay off without wages, even in the case of an annual pit bond binding the workers to a year’s exclusive service. In this sense, long- service agreements effectively benefited only the employer; the worker was bound without having the protection of security of income or employment.

To make life that bit more difficult for the workers, they didn’t even have the same rights in court as their masters. As Paul Johnson points out:

A master sued by a worker could be a witness in his own defence, but until 1867 a worker prosecuted by an employer could not give any evidence on his own behalf.

But the power imbalance doesn’t stop there. Under master and servant law, workers were subject to criminal sanctions for breaches of their contracts while masters were only subject to the civil law. In cases of breaches of contract, workers had to pursue employers through the courts, while employers had the entire apparatus of criminal law enforcement at their disposal.

According to Professor Johnson, there were around 10,000 prosecutions a year for breach of contract in the mid-19th century. These were concentrated in the industrial areas so the likelihood of a worker knowing someone who had been brought before the court was high:

The annual chance of a working-class household suffering criminal prosecution for breach of labour contract lay between 1 in 150 and 1 in 200 – a sufficiently high rate for knowledge of the risk to be well known within working class communities.

And, of course, where contracts were for a fixed term, breach of contract could simply mean leaving your employer for another job. Suresh Naidu and Noam Yuchtman studied the master and servant prosecutions during the nineteenth century and found that most were brought for absconding.

The typical goal of a prosecution was to use the threat of incarceration and hard labor to prevent workers from leaving an employer, and to pursue and punish those who were not deterred.

The threat of prosecution was credible; not only were prosecutions common but they were also largely successful.

The use of the word absconding reflects the attitudes of the time. Workers were deemed to be bound to their masters. Those who tried to improve their wages by looking for work elsewhere could expect severe punishment, backed up by the criminal law.

The penalties could be harsh and, during the late 18th and early 19th centuries, the Master and Servant Acts became more punitive. Usually workers were ordered back to their masters or were forced to pay compensation but in some cases imprisonment and even beatings could be imposed. The law was reformed in 1867, replacing the more brutal punishments with fines. However, as most of these workers were poor, the effect of a fine may simply have meant that they later ended up in prison for being unable to pay it.

Chart by Suresh Naidu and Noam Yuchtman

Perhaps unsurprisingly, Naidu and Yuchtman also noticed a relationship between the level of unemployment and the incidence of prosecutions:

[P]rosecutions and the unemployment rate move in opposite directions throughout the period for which we have data.

They also found that, once master and servant law was abolished in 1875, wages rose fastest in the counties with the highest rate of prosecutions.

This, then, might account for the different shape of the Phillips curve after 1860. Once criminal sanctions were removed for workers who tried to seek employment elsewhere, the labour market outcomes began to reflect supply and demand more closely. The rise of trade unions, who played a major role in the campaign to abolish master and servant law, increased the bargaining power of labour.

To put it another way, it is likely that Phillips curve was held flat until the 1860s by draconian labour laws. It is difficult enough for workers of limited means to challenge their employers at the best of times but laws preventing them from giving evidence against their employers and imprisoning them for leaving their jobs made for a very lopsided balance of power. Any countervailing power that falling unemployment might have given to the workers could be neutralised by the criminal law. Servants who got above themselves could, quite literally, be captured and brought back. If we think there is an imbalance of power in the workplace now, it’s nothing compared to the mid 19th century. In those days, trying to get a pay rise was a very dangerous game.

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Is austerity over?

Is austerity really over? That depends what you mean by austerity, of course. Certainly the aggressive deficit reduction targets that George Osborne set and kept missing have been abandoned. As the Resolution Foundation’s Adam Corlett pointed out before the election, going by the OBR’s most recent forecasts, it is now unlikely that the deficit will be eliminated before the middle of the next decade.

This means that the cuts to public service spending will not be as severe as they were in the first half of this decade. As this next chart, from the Institute for Fiscal Studies shows, real terms public service spending is forecast to increase slightly during the next few years. However (and its surprising how often this gets missed in discussions about public spending) the population is forecast to rise so spending per person is still likely to fall.

Departmental expenditure limits since 2007–08Once you take out capital investment, there is a sharper fall in the amount left for day-to-day public service spending. The Office for Budget Responsibility expects it to fall by around 6 percent by 2022.

The trouble is, these shallow cuts will come on top of deeper ones made earlier in the decade. A report by the Institute for Government earlier this year warned that the ability of the public sector to maintain services while cutting budgets has “run out of steam”. Warning lights are flashing in the NHS, in schools and in local councils. Even this scaled back austerity might be enough to tip some public services over the edge.

And what of the other half of public spending, social security? This, too, is set to fall, as this IFS chart shows.

However, it might not fall by as much as the government thinks. Look at this chart closely and you will see that, in spite of the employment rate being at a record level and benefit entitlements having been reduced, working-age benefits are still slightly higher relative to national income than they were before the financial crisis. A combination of low wages and high housing costs means that, even though they are in paid employment, many people still rely on some form of state support.

This is unlikely to change much over the next few years. When George Osborne planned these benefit cuts, he assumed that the economy was set for a period of steady growth for the rest of the decade. That now looks very optimistic. Since the Brexit vote, the OBR has downgraded its growth forecast.

Inevitably, this will have an impact on earnings. The Resolution Foundation does not expect average pay to return to its pre recession level until the next decade.

Furthermore, it forecasts that the combined effect of low pay, inflation, high housing costs and benefit cuts will lead to a significant fall in income for those in the lower half of the income distribution.

Until now, our tax and benefit system has been doing a reasonable job of levelling out the UK’s income inequality. If these cuts go through, all that will change.

Which is why I’m not convinced that they will. The question of cuts to tax credits was kicked down the road when there was a row about it in 2015. At the time I suggested that the distress caused by the cuts might be politically damaging and could even cause social unrest. Looking at the mood of the country at the moment, that looks even more likely now than it did a couple of years ago. The government backed off in 2015. Is a minority government, mired in Brexit negotiations and with a slowing economy, likely to show more resolve?

But if the government can’t cut the cost of benefits, it either has to borrow more, increase taxes or make even deeper cuts to public services. Perhaps that is why the chancellor has made gentle hints about tax rises. If they happen, it is unlikely that they will only hit ‘the rich’.

So, while  George Osborne’s aggressive deficit target has been abandoned, when it comes to people’s experience of public services and the tax and benefits system, austerity is far from over. Taxes may rise and benefits will almost certainly be cut. The public sector will find it ever more difficult to provide services to a rising population. Such is the brutal arithmetic of public spending. After the cuts of the last few years, even the relatively mild ones to come are going to hurt.

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The end of the Long 90s

Are we at a pivotal moment in British politics? Is last Thursday’s electoral upset a sign that the assumptions of the last three decades no longer hold true?

For the last 30 years, what David Goodhart called “the two liberalisms” have prevailed, the economic liberalism of the right and the social liberalism of the left, “Margaret Thatcher tempered by Roy Jenkins.” The Conservatives concentrated on deregulation, union busting and privatisation, while talking tough, but avoiding any action on, on immigration, political correctness and traditional values. Meanwhile, Labour focused on a socially liberal agenda without attempting to roll back the economic gains of the right.

It was almost as though a tacit deal had been struck; you can have diversity, minority rights and discrimination laws if we can have privatisation, deregulation and tax cuts. The effect was to take policies that were popular with the public off the agenda on the grounds that they were publicly unacceptable. This applied both to left-wing and right-wing policies. Renationalisation and higher taxes on the rich were never going to happen but neither were the restoration of capital punishment or significant curbs on immigration. All were considered to be outside the Overton Window, the range of policies that politicians and media commentators said were politically acceptable.

Politics was all set to continue like this. As the Economist’s Bagehot column put it earlier this year:

Tony Blair converted Labour to Thatcherism and David Cameron converted the Tories to Jenkinsism.

While all this was going on, voters, and especially young voters, started to lose interest in elections. Turnout fell after 1992 and never really recovered.

Chart via Resolution Foundation

The ‘what’s the point’ arguments and the sense that anything that really mattered to people was off the agenda, contributed to the general sense of disempowerment. ‘They’ were all the same and anyway, big corporations controlled everything. While the economy was growing and people felt reasonably secure, they would put up with the parties they had long supported focusing on things they thought were irrelevant or to which they were mildly opposed. But when the economy collapsed, trust in political parties and corporations went with it.

The squeeze on pay and living standards fuelled a frustration with the business and political establishments that had been gathering pace for a while. Populism is usually depicted as right-wing but, while it focused most obviously against immigration, there was an anti-corporate element to it as well. Many of the people who voted for Brexit (and for Trump and Le Pen) didn’t like immigration and political correctness but they didn’t care much for corporations and free-market policies either. Theirs was a revolt against immigration but also against ‘rich banksters’ and the offshoring of jobs.

Brexit showed that, if enough people are for or against something, by voting, they can start or stop things from happening, regardless of what big business or any other powerful interests might say. Older voters discovered this first. The EU referendum saw a percentage turnout not seen since 1992. It brought people out who hadn’t voted for years. Turnout rose with age, according to some surveys reaching 80-90 percent among the over 65s. The pro-Brexit anger was partly economic and partly cultural. Older working class voters, who were concerned about immigration, played a large part in delivering the Leave majority.

This was the vote that the Conservatives believed they could pick up at the election. With its interventionist policies, the Erdington Modernisation was all about reaching out to those working class voters who had become disillusioned with the Labour Party. Much to the disgust of the Economist, the Tory manifesto was more statist than at any time since Edward Heath.

This strategy worked, up to a point. The Conservatives took seats from Labour in the Midlands and increased their share of the vote. As the FT’s Chris Giles and Gemma Tetlow noted, the higher the Leave vote in a constituency, the more the Conservative vote share increased.

It also increased in areas with a higher proportion of retired people.

The Conservatives also gained most from the collapse of UKIP. These are the factors which enabled the Tories to win seats like Mansfield and North East Derbyshire.

If that is all that had happened, things would have gone according to plan and the Conservatives would have been returned with a larger majority.

The problem for the Tories, though, was that not all the Labour voters who had defected to  UKIP went on to vote Conservative. Some went back to Labour. Furthermore, Remain voters under 45, many of whom would normally have supported the Conservatives, deserted them.

And, finally, young voters got the message about voting too. The referendum was a wake-up call. Campaigns over the last year to encourage them to vote seem to have worked. It’s too early to say for certain how high the young voter turnout was. It was almost certainly up on previous years, though the 72 percent figure being bandied around last week may well have been exaggerated. Nevertheless, there is evidence that those aged 18-25 helped to compensate Labour for the loss of its Leave-voting supporters. The party’s largest increases came from areas with a high proportion of young people.

This was enough to scupper the Conservatives’ chances of getting an overall majority. Although the party increased its share of the vote to its highest since 1987, the Labour Party increased its vote share too. The older working class voters stuck to the script but many of the youngsters, who were expected to stay at home, turned out for Labour, as did the younger middle-aged. The Erdington modernisation failed to gain Erdington where, although the Tory vote increased by 8 percent, the Labour vote went up by 12 percent. It was a similar story across most of England and Wales.

Like the Conservatives, Labour attracted new voters by pitching policies that had been off the table since the 1970s. Before the election, conventional wisdom said that Jeremy Corbyn was too left-wing but, as the campaign went on, it became clear that a lot of people liked the Labour Party’s ideas. Its interventionist policies, like taxing the rich, banning zero hours contracts and nationalising the railways and energy companies, went down well. Even those who weren’t especially fond of Mr Corbyn liked a lot liked a lot of what his party was saying.

It was a campaign the like of which we haven’t seen for decades. Representatives of business complained about their loss of influence, while the Economist lamented the abandonment of neoliberalism. The main parties put forward policies on immigration, price controls, industrial policy, tax and nationalisation which had been deemed unacceptable until recently. And they proved popular. People threw their votes at the Overton Window and smashed it.

Cultural theorist Jeremy Gilbert came up with the term “The Long 90s” to describe the period between the fall of the Berlin Wall and the Great Recession. He noticed, as Kurt Andersen pointed out in a Vanity Fair article in 2012, that the rapid changes in fashion and music that characterised the postwar period seem to have slowed or even stopped altogether after the 1990s. The 2000s and 2010s produced some talented musicians but their music wasn’t new.

For arguably the first time since the beginning of recorded music, there isn’t any that you couldn’t have quite easily imagined being made 20 years previously.

This cultural stagnation, he says, reflects the political torpor we have experienced since the 1990s. But he thinks we may be coming to the end of that period.

I think that we are probably already at the end of that moment that I’ve called the long 1990s.

It may be that the phase we are about to enter is merely the third phase of a very long period unbroken neoliberal hegemony. But if the key feature of the long 90s was the pervading sense that even on the Left, the normativity of neoliberalism could not be refused, then that moment is clearly now over.

He wrote that two years ago. The events of the last year suggest that, in the UK at least, he may be right. Suddenly things look very different. The assumptions of the Long 90s period, with its low election turnouts and limited role of the state, have been challenged. The former Labour voters who transferred their allegiance to Theresa May and the young voters who flocked to Jeremy Corbyn want more state, not less. They want the government to do something and they have discovered that voting can make a difference.

Even though it didn’t win the election, Labour is riding high. It is benefitting from the post-election opinion poll bounce that usually goes to the winning party. It is not inconceivable that Labour might come to power in 2022, or even sooner, with a radical and interventionist agenda. No longer constrained by EU regulations, a left-wing government could tax, nationalise, subsidise and regulate whatever it liked. The campaign for Brexit was, for the most part, led and financed by the libertarian free-market right; people who want more deregulation, less tax and a smaller state. It is beginning to dawn on some of them that Brexit may deliver the exact opposite. For Andrew Lilico, one of the relatively few economists to support Brexit, all that matters now is stopping Corbyn.

Everything else is secondary now to stopping him. Austerity, Brexit, public services reform, trade deals with the US, foibles about doing deals with Irish politicians or Lib Dems – even new anti-terror laws. Everything else is secondary and expendable for the moment.

It was their own fault. The Brexiters fanned the flames of populism and re-introduced people to the notion that voting might change things. They thought that the new post-Brexit Britain would be theirs. Now they realise it probably won’t.

When historians and political scientists look back, in a decade or so, one image will define the Summer of ’17. It won’t be a distraught Theresa May or a waving Jeremy Corbyn. It will be the burning Grenfell Tower. It is still way too early to be clear about what went wrong and whose fault it might have been but, regardless of the causes of the fire, as the Guido Fawkes blog complains, the political fallout is already damaging the Conservatives. It doesn’t really matter how much of a role austerity, a scrimping Tory council, outsourcing and deregulation had in making the catastrophic blaze more likely, the story fits the spirit of the times. Grenfell was a tower block housing the poor in the middle of one of the country’s richest constituencies, the one in which, less than a week earlier, Labour had overturned decades of solid Tory majorities. It may, in time, become a symbol of the point at which British politics turned.

Of course, this may all turn out to be summer hysteria. Maybe things will calm down in the autumn. In this business-as-usual world, the Conservatives will get a new leader and the free-marketers will reassert themselves to produce a less interventionist set of policies. They will win a solid majority and post-Brexit Britain will simply be a slightly poorer version of its early 21st century self. Labour will moderate its tone to win in 2022 and continue the process. Once the summer storms are over, the glaziers will repair the Overton Window and shut out the turbulent elements.

Somehow, though, I doubt it. It was always likely that Brexit, coming when the UK was still dealing with the aftershock of the financial crisis, was going to cause significant economic upheaval. Combine that with a renewed enthusiasm for voting and all sorts of things become possible. I still think we are in for some interesting times, Perhaps the Summer of ’17 really will be the end of the Long 90s.

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Brexit: Are we facing a workforce crunch?

One good thing to come out of the Brexit vote (though some of you might dispute this) is that I’m getting invited to do more panel discussions and round tables. At a couple I have been to recently, senior executives from the hospitality industry have remarked that they are not only concerned about a skills shortage, they are worried about an overall labour shortage. They believe there will simply not be enough people to fill all their jobs.

The assumption that the UK will only need skilled migration after Brexit runs through much of the media discussion. That the Labour Party had even considered the option of work visas for unskilled migrants was greeted with hysterical headlines last week. Suggesting that the country might need unskilled migrants is treated as heresy. But if the UK were to apply the same skills and earnings criteria to EU migrants as it does to non-EU migrants, around 75 percent of those currently here would not qualify. Even if, as is likely, many of them stay after Brexit, over time, restrictions on migration would almost certainly lead to a shortage of labour.

Consultancy firm Mercer published a report earlier this year in which they modelled the various migration scenarios and the likely impact on workforce numbers. They based workforce participation rates on OBR projections, assuming that participation would increase among older workers as the state pension age rises. They then came up with four scenarios from 2020, based on net migration falling to 185,000, 150,000, 90,000 and going negative. The scenarios are explained here:

The likely impact of all four scenarios is a working population growing more slowly than the total population.

I put these figures on a chart to show how far the workforce declines as a percentage of the population under each scenario. For clarity, I’ve kept as close to Mercer’s colour scheme used above as I could.

The underlying problem here is that the UK-born workforce appears to have stopped growing. The number of UK-born in work is barely a quarter of a million more than at its pre-recession peak but its rate of employment is at a record high.

Even though the UK born employment rate is higher than it has been since the ONS started counting, almost all of the post-recession employment growth is accounted for by those born elsewhere. This suggests that there isn’t much extra capacity among those born in the UK. Sure, the quality of some of the jobs could be better and those on short or uncertain hours would benefit from more secure work but even this would not increase the capacity of the workforce by much. Without immigrants, the percentage of our population in work is likely to go into a steady decline.

Mercer’s 100,000s scenario is particularly interesting because it is closest to the Conservatives’ stated migration target, which, as Theresa May said last week, they aim to achieve by 2022. According to Mercer’s projections, population and workforce profile would change significantly over the next 15 years or so. With fewer migrants arriving and a large cohort of the UK-born population moving into retirement, the workforce would fall to around 49 percent of the population.

It would be possible to increase workforce participation by encouraging more over-65s to stay in work, by helping some inactive groups back into work and by relocating some activity to areas of higher unemployment but the fact that employment rates are already at an all time high suggests that there isn’t that much spare capacity available. We’d need some more creative ideas than we’ve come up with so far to get participation rates higher still.

It is likely that many of the jobs created since the recession would not exist were it not for the availability of migrant labour. According to the most recent ONS statistics, there has been no increase in the number of UK-born in employment over the last year. All the net increase in employment has been due to those born abroad. It is likely, then, that many employers will struggle if their labour supply is choked off and some may well go out of business.

Some will, no doubt, argue that this is a good thing and the UK should never have allowed this number of migrants into the UK in the first place. That’s as may be but they were and our economy has come to depend on them. Reducing their numbers by more than half over five years is likely to be extremely disruptive. An executive from a large manufacturing firm told me that they are more worried about a shortage of skills and labour than they are about increased friction and cost in their supply chain after Brexit.

Perhaps the labour shortage will shock companies into investing more in technology and training or in moving to areas where there are more workers available. However this would require a radical change in the UK’s short-termist buy-not-build business culture that has prevailed over the last few decades. It would also not happen overnight.

British employers are in for a labour shortage shock to add to the trade and uncertainty shocks that will come with Brexit. Managing it will be a huge task and one which, from my anecdotal observations, a lot of businesses haven’t yet understood and prepared for.

All of which leads me into a plug for a CIPD event in a couple of weeks time. Mercer are publishing an update to their report later this month and its author, Gary Simmons, a former colleague of mine, will be presenting the results. It promises to be a thought-provoking discussion and one that is likely to be of interest to many readers of this blog. It’s free to all CIPD members. There is a token charge for non members but it’s not much more than the price of a pint.

The event is at 6.30pm on 19 June, in the week of the Brexit vote anniversary, at the Lyric in Hammersmith. To book, follow the link below.

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Pay attention business: politics is back!

Yesterday I went to a Brexit Briefing organised by the Global Success Partnership. We got into a discussion about how unprepared business was for what happened in 2016 and how most companies still have a pretty poor grasp of politics. KPMG’s public policy director, Mark Essex, remarked that business hadn’t really had to take account of politics for the last 40 years or so and that boardrooms need to be more focused on the geopolitical agenda.

There is certainly a sense of bewilderment among business leaders at much of what happened in 2016. I sense, from talking to people in a number of sectors, that there still is. People know intellectually that we will leave the EU and probably the Customs Union too but they don’t quite accept it emotionally. Few believe there will be a cliff edge Brexit with no deal and a default to trading under WTO rules. ‘It will never happen. Something will get sorted out,’ is a sentiment I hear a lot. But Mark Essex is advising his clients to prepare for such a scenario, not because he thinks it will certainly happen but because there is enough of a risk that it might:

Any reasonable politician wants to avoid this scenario so surely a disorderly Brexit is vanishingly unlikely? I do believe goodwill exists on all sides. However in an increasingly unpredictable world and a scenario like Brexit – where a lot of different things all have to go right – the actual chance of failure is higher than many realise.Imagine our ship, The Brexit, has to navigate around six rocky hazards. Even if it has a 95% chance of making it past each one, taken together, the ship still has a 1 in 4 chance of mishap.  That is why some commentators have put the chance of ‘no deal’ at 1 in 3, and some as low as 50-50.

As shocking as Brexit was, though, many business leaders have also been surprised by the Red Tory direction of the Conservative Party under Theresa May’s leadership. Business groups and employers’ organisations were, to say the least, disappointed by the Tory manifesto. Bloomberg quoted one private equity boss, saying Theresa May is “the least business-friendly Conservative prime minister in decades”.

The Economist, too, is aghast, advising its readers to vote Liberal Democrat:

Though they sit on different points of the left-right spectrum, the Tory and Labour leaders are united in their desire to pull up Britain’s drawbridge to the world. Both Mrs May and Mr Corbyn would each in their own way step back from the ideas that have made Britain prosper—its free markets, open borders and internationalism. They would junk a political settlement that has lasted for nearly 40 years and influenced a generation of Western governments (see article). Whether left or right prevails, the loser will be liberalism.

Which, of course, is the point. The last 40 years were defined by what David Goodhart described as the triumph of the two liberalisms; the social liberalism of the left and the economic liberalism of the right. The people who voted for Trump, Brexit and Le Pen, by and large rejected both. They didn’t like immigration and political correctness but they didn’t care much for corporations and free-market policies either. In the UK, three-quarters of UKIP voters supported re-nationalisation of the railways and utilities. The phenomenon that we call populism is neither left nor right, at least, not in the way that we have been using those terms in recent decades. It’s a revolt against immigration but also the offshoring of jobs. It dislikes ‘rich banksters’ as much as ‘nanny-state social workers’. And it wants more state, not less. It wants governments to ‘do something’ about immigration, crime, stagnating wages and the lack of secure employment.

The Economist hopes things will soon get back to normal:

Backing the open, free-market centre is not just directed towards this election. We know that this year the Lib Dems are going nowhere. But the whirlwind unleashed by Brexit is unpredictable. Labour has been on the brink of breaking up since Mr Corbyn took over. If Mrs May polls badly or messes up Brexit, the Tories may split, too. Many moderate Conservative and Labour MPs could join a new liberal centre party—just as parts of the left and right have recently in France. So consider a vote for the Lib Dems as a down-payment for the future. Our hope is that they become one element of a party of the radical centre, essential for a thriving, prosperous Britain.

Which earned it this stinging rebuke from Guardian economist Aditya Chakrabortty:

Is he right? Could this be the end of the Roy Jenkins and Margaret Thatcher blend that has held sway since the 1980s? It has become fashionable in recent weeks to call time on populism, especially after the defeats of Geert Wilders and Marine Le Pen and the collapse of UKIP. But this is to ignore the gravitational pull that populism has had on the mainstream parties. The Red Tory agenda has come about almost entirely because of Brexit and the Conservatives’ strategy of appealing to working class voters attracted away from Labour by UKIP. Labour, traditionally more in favour of immigration, has stated its opposition to free movement. Angela Merkel, facing an election next year, has also taken a tougher line on immigration, though still not tough enough for some in her party.

We should also be wary of the assumption that the Labour revival at the expense of Theresa May’s Red Toryism signifies the waning of populism. Populism has left-wing as well as right-wing aspects. By appealing to them, Labour has increased its support. Labour’s interventionist policies, like taxing the rich, banning zero hours contracts and nationalising the railways and energy companies, are popular. The collapse in support for Jeremy Corbyn’s Labour Party was blamed on it being too left-wing but voters actually like a lot of those left-wing policies. What they are less keen on is a leader they perceive as lacking in patriotism and likely to run down the country’s defences. That sort of thing doesn’t go down well with those northern voters who, as Sunder Katwala said, are most proud of the NHS and the army and won’t hear a word said against the Queen.

There are signs of an organisational revival in the Labour Party. Last year’s chaos has given way to a formidable election campaign which even the party’s opponents admit has been well run. It is not inconceivable, then, that a new leader with a revitalised party might lead Labour to government once again. One, in many ways, just as left-wing as Jeremy Corbyn’s but taking slightly tougher line on immigration, keeping Trident and protecting defence spending, while also nationalising the railways and utilities, increasing worker protection, regulating corporations and raising taxes. No longer constrained by EU regulations, a left-wing government could nationalise and subsidise whatever it liked. While the Economist hopes for a political realignment and the emergence of a new centre party, it is just as easy to imagine Theresa May’s government being replaced in 2022 by one that is even less corporation friendly. Before the last election, Fraser Nelson predicted the rise of left-wing populism. He may yet be right.

Over the last few decades, British business has been operating in a relatively benign environment. Open goods trade with our nearest neighbours, falling restrictions on services, some of the lightest regulation in the developed world and access to a huge pool of mobile, well-educated, English-speaking labour. But the political developments that we lump under the populist heading may have brought this period to an end. That free trade and free movement are good for everyone is an argument that is becoming increasingly difficult to win, regardless of the evidence. The next decade might not be so corporation-friendly.

What I still find surprising is that so many people in major companies didn’t see any of this coming. In January, after reading about the collective sense of shock at the Davos meeting, I reflected on how little discussion of politics I had seen in companies over the past 30 years. It’s not as though no-one saw any of this coming. I have had my eye on the forces that led to the rise of UKIP and ultimately to Brexit for a few years. (Though, until recently, I didn’t think the impact would be so great.) Some people, like Matthew Goodwin and David Goodhart, have been on the case for a lot longer. The phenomenon that we call populism didn’t happen overnight. It had been gathering pace since over the previous fifteen years or so. The financial crash poured petrol onto the fire bit it didn’t start it. The sparks were there some years earlier. But no-one in business was paying attention. They hadn’t had to take much notice of politics for years and had become used to seeing it as an interesting side-show.

Of course, the hopes of the Economist and others might be right. Perhaps populism will burn itself out and we will return to the business friendly world in which, with some small variations, the two liberalisms guide our major political parties once again. Even if that happens, there will be some volatile times beforehand. Brexit has raised people’s expectations in all sorts of areas, whether it be more secure jobs, higher wages, better public services or fewer immigrants. With trust in business at an all time low, if any or all of these things are not delivered people are likely to blame ‘elites’ and demand more government action. After being ignored for decades politics has taken business by surprise.   If they don’t want it to happen again, people in the boardrooms need to pay a bit more attention.

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Employers: It’s your job to get migration down to 100,000

The Conservative manifesto has reiterated the party’s promise to cut net migration to below 100,000. That implies a reduction of over 60 percent and, although the manifesto doesn’t give a timeframe, even achieving the target by the next general election would be a colossal task.

So how will it be implemented? Who is going to deliver this massive reduction in immigration? Employers, of course.

There was much talk during the Brexit referendum about taking control of our borders and  Theresa May repeated the phrase at the manifesto launch. It is very unlikely, though, that the UK will introduce restrictions on the entry of EU citizens at the borders. Any constraints the UK places on travel from the EU are likely to be reciprocated. Therefore, if we require visas from EU citizens, then we will need visas to visit European countries. If we start interrogating Romanians and Bulgarians when they arrive at Gatwick about the purpose of their visit to the UK, we can expect the same treatment when we go on business to Frankfurt or on holiday to Greece. Brexit will do enough damage to UK trade as it is. Making it more difficult for people to travel around Europe would aggravate the problem.

Furthermore, it would clearly be absurd to require visas from the rest of Europe when we don’t ask for them from visitors from countries much further away. Why would we demand visas from Austrians and Belgians but not from Argentinians and Brazilians?

UK visa requirements

Map via Wikipedia

In all likelihood, after Brexit, travel from the EU will be like it is from any other non-visa country. People will turn up at ports, airports and stations, have their passports checked and be waved through. All that will be different is that the EU fast-track lane will probably disappear.

Much of the UK’s immigration control has nothing to do with borders. If someone arrives from a visa-free country they can stay for 6 months provided they can support themselves. It’s that last bit that’s important. Most are not rich enough to do that, so, effectively, we control immigration through access to the labour market. As Jonathan Portes explained to the House of Commons Exiting the European Union Committee:

Ending free movement immigration control is not going to be enforced at the borders at all. It simply is not. We are still going to let people in, at Stansted and Heathrow, with French passports. They just will not have the right to work here, and that right to work will be enforced at the workplace.

As he said in a NIESR paper he wrote in November, talk of border controls is a red herring:

Immigration control (of EEA nationals) does not (mostly) mean border control. It does not seem likely that we would restrict EEA nationals’ right to enter the UK without a visa. A fully fledged visa regime for EEA nationals would be hugely disruptive to trade, travel and tourism – even leaving aside the obvious point that this would mean UK nationals would require visas to travel to continental Europe. And it would mean that they were treated worse than, for example, Americans or Australians, who do not need a visa to enter the UK.

This means that control over how many and which EEA nationals are allowed to work in the UK will not, in practice, be applied at the border in the vast majority of cases. As with other non-visa nationals,  it will be applied in the workplace; employers will have to verify that EEA nationals are entitled to work in the UK, just as they currently do for non-EEA nationals. Talking about ‘border controls’ for EEA nationals or reintroducing ‘controls’ over ‘who enters the country’ misses the point almost entirely.

Despite the rhetoric and imagery used during the referendum campaign, the vast reduction in EU immigration required by the Conservatives would not be enforced by an army of border guards. Instead, it would be enforced by an army of recruiters around the country.

The EU accounts for about half of all migration and the majority of migration for work. Any significant reduction in migration therefore means that it will have to become a lot harder, and a lot more expensive, to recruit people from the EU. The Conservatives are already proposing to double the levy on non-EU workers. Whether similar measures would be implemented for non-EU workers depends on what is agreed with the EU but for the government make its migration number it will have to make employers jump through a lot more hoops. A cap of 100,000 doesn’t leave much room for manoeuvre. Last year the UK admitted 60,000 workers and their dependents on intra-company transfers alone.

This is likely to be especially difficult for employers in London. Earlier this year, Demos looked at the combined risks from loss of labour supply and loss of trade after Brexit. Their report drew similar conclusions to the one published in Regional Studies earlier this year (see previous post for a discussion of the findings). London is at less risk from loss of exports than other parts of the country. It is, however, a lot more dependent on EU labour.

When it comes to trade, London’s economy is globalised and less dependent on EU trade than the rest of the country. For its workforce, however, it is very dependent on foreign workers. According to Migration Observatory, 45 percent of all migrants self-employment  and 36 percent of all migrants in employee jobs live in London. (London accounts for about 14 percent of total UK employment.)

A cap in immigration is also likely to hit particular sectors very hard. Food manufacturing, hotels, restaurants, distribution and care homes are particularly vulnerable. An immigration cap of 100,000 would create not only a skill shortage but an overall labour shortage. There just wouldn’t be enough people to do all the jobs. The employment rate among the UK-born is already at a record high and even allowing for some underemployment, there isn’t much spare capacity there. As Torsten Bell says, the only significant pocket of unemployment is among the disabled.

Chart by Resolution Foundation

The burden of implementing the 100,000 net migration target, then, would fall on employers, in the form of additional migration-related cost and administrative workload but also in frantically re-organising workplaces and trying to work out how the hell to manage as the labour supply gets choked off. All of this will involve a significant amount of work and expense.

Will net migration ever really get down to 100,000? Who knows? Theresa May had the opportunity to quietly ditch the pledge at this election. The Conservatives are so far ahead in the polls that they could have dumped the policy without too much risk. George Osborne, in his new role as editor of the Evening Standard, described it as economically illiterate and claimed that no senior ministers support it. But Theresa May  is a woman on a mission, to change both the Conservative Party and the country. Might this be one of the things which she is determined to see through?

But even if the 100,000 figure is unachievable there will surely be pressure to significantly reduce migration over the next few years. Even a reduction by 100,000 would be difficult enough. It will be the job of employers to make that happen. UK immigration is controlled at the workplace, not at the borders. The rapid reduction in immigration will be implemented not by immigration officers but by HR departments. Cutting migration by more than half is a huge task but it will be employers who do most of the work.

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The Red Tory moment

It’s fascinating watching what is happening to our two main political parties. Most of the media attention has been on the turmoil in the Labour Party but what is happening on the Conservative side is every bit as interesting. The FT reports that some Tories are worried about a shift away from free market ideology as Theresa May promises more interventionist policies, such as a cap on energy prices, a crackdown on companies who underfund pension schemes, investment in new council houses and the “greatest extension of rights and protections for employees by any Conservative government in history”.

This new direction is known as the Erdington Modernisation. Led by the prime minister’s adviser Nick Timothy, it sets out to target working class voters. It is designed to appeal to people in areas like Erdington, where Mr Timothy grew up:

They are the people whose lives are most affected – for better and worse – by politics. They can’t choose to send their kids to a private school when the schools around them are terrible. They can’t opt out of the NHS if they find themselves in a dirty hospital or at the end of a long waiting list. They are the ones who find themselves out of work, on reduced hours, or with never-ending pay freezes when the economy goes wrong. They find themselves unable to afford the mortgage when interest rates go up. They have to go without when their taxes rise. They are the people for whom debates about tax credits are not about spreadsheets, headlines or dividing lines but about whether mum can go back to work or not.

He has some harsh words for what he calls the snobs and libertarians in his own party:

We all know the kind. They reveal themselves through minor acts of snobbery, strange comments that betray a lack of understanding about the lives of ordinary people, or when they are councillors or Members of Parliament by the policy positions they take. I remember one MP who, as a member of the Shadow Cabinet, once said: “school reform is all very well but we must protect the great public schools, because we need to look after our own people.” Quite how many of the millions of core Tory voters he thought had attended public schools was never explained. And then there are the libertarians who make it a mark of their ideological machismo that they quote Ayn Rand, whose heroic character Howard Roark boasted in The Fountainhead: “I recognise no obligations toward men except one: to respect their freedom.” No wonder our opponents feel they can accuse us of callousness.

It should be simple enough to keep people like this away from the cameras, out of high office and ideally nowhere near any position of influence in the Party.

Strong stuff. It’s no wonder some people are worried.

For the last thirty years or so, the Conservative Party’s direction of travel seemed pretty clear. Since the 1980s what David Goodhart called the two liberalisms have dominated politics; the social liberalism of the left and the economic liberalism of the right.

As he said:

Whoever you vote for you get the same old mix of economic liberalism and social liberalism – Margaret Thatcher tempered by Roy Jenkins.

The Conservative Party emphasised economic liberalism at the expense of its social conservatism. At the same time, the Labour Party promoted socially liberal polices while almost completely ditching socialism. As the Economist’s Bagehot column put it:

Tony Blair converted Labour to Thatcherism and David Cameron converted the Tories to Jenkinsism.

George Osborne epitomised the 21st century Tory party, a welfare-cutting fiscal conservative who publicly congratulated a colleague on her same-sex relationship. When Andrew Lloyd-Webber flew back from the US to vote against tax credits, his previous vote in the Lords having been in favour of gay marriage, Bridget Christie quipped, “he loves gays but hates the poor.” A bit harsh, perhaps, but as a caricature of the prevailing political culture it contained a grain of truth. Lord Lloyd-Webber’s voting priorities, cutting benefit spending and advancing LGBT rights, were very much in the spirit of the times.

Most of the party had accepted much of Roy Jenkins’s social liberalism long before David Cameron. This process started in the 1980s. Margaret Thatcher talked tough on immigration. Camilla Schofield believes that her comments about Britain being swamped by immigrants “all but destroyed the National Front“. Frazer Nelson agrees. But despite the socially conservative rhetoric, much of what Margaret Thatcher’s government did was economically liberal; deregulation, privatisation and weakening the unions. Apart from the infamous Section 28, there wasn’t much to appease the social conservatives. While the prime minister might have thought there were too many immigrants being allowed in to the UK she didn’t do much about it. Immigration, though low by today’s standards, went on pretty much as it had during the 1970s. It often surprises people to learn that corporal punishment in state schools was abolished under Mrs Thatcher. Part of the reason for her success is that lots of people thought she was doing conservative things when most of the time she was working on liberalising the economy.

Many conservatives have deep misgivings about the Thatcher legacy. Phillip Blond, the author of Red Tory, for example:

She also traduced the wider conservative tradition and her legacy – though not her intention – has been to produce a deeply reductive economic libertarianism as the dominant form of Conservatism in Britain today. And the displacement of the wider conservative tradition by economic libertarianism is what continues to confine the Conservative Party today, making it a Liberal party rather than anything genuinely conserving or Tory.

If some conservatives weren’t happy with the liberal direction of their party something similar was also true on the left of politics. There was a disenchantment with the Labour Party among working class voters. Many felt their party was left-wing about the wrong things. It is wrong to dismiss this as bigotry. It is not sexist or homophobic to wonder why your party is campaigning for gay marriage and women on boards while your neighbours are relying on tax credits and your area turns into boarded up slum.

In a prescient article in 2004, David Goodhart warned of a rise in identity politics and anti-immigration feeling among working class voters. And so it proved. Immigration, which had barely been on the public’s radar in the 1990s, became a much more important issue in the mid-2000s.

As Paul Whiteley has pointed out, opposition to immigration isn’t just about economic concerns. Especially among older voters, it was perceived as threat to identity and culture.

For the past decade or so, then, there has been a growing constituency of voters at odds with the socially and economically liberal political culture; wanting tougher action on crime and worried about immigration but also critical of corporate elites, fearful of globalisation and believing that the railways and utilities should be renationalised. Such people could be found among Conservative and Labour supporters.

This looked like trouble for both main parties. If voters really were rejecting the two liberalisms there was surely an opportunity for a new party with a more socially conservative and economically interventionist agenda to sweep them up. Something similar, perhaps, to the European parties of the populist right.

I spotted the front cover of Prospect’s Red Tory issue on a cold day at Glasgow station in Winter 2009. I bought it to read on my train journey.

It was certainly intriguing. Was this the new strategy, I wondered. Were the Tories going to change course, dump their economic liberalism and pitch to patriotic and socially conservative working class voters? Then along came Blue Labour, with a similar theme. Was the Labour Party going go for the same voters by downplaying its social liberalism and its support for immigration? For a while there was a lot of excitement about all this but then the Red Tory moment seemed to pass.

Neither of the main parties, it seemed, was about to change its message. The Conservative Party continued on its liberal course and I, like many other people, assumed that George Osborne would become its next leader. Perhaps no-one was interested in the votes of those described by Max Wind-Cowie as “dissatisfied of Tunbridge Wells and downtrodden of Merseyside”.  Either that or party strategists simply assumed their votes could be taken for granted.

But the question kept cropping up. These paragraphs are from two posts I wrote almost exactly five and four years ago.

The first in May 2012 on David Goodhart’s post liberalism:

It could be, then, that the more statist sides of both left and right reassert themselves. Voters across Europe might decide they want more regulation, both economic and social, not less. There is a mood across the political spectrum for clamping down on high pay, tax dodging and corporate excess but also on crime, migrants and welfare claimants.

The second in May 2013 reflecting on a New Statesman debate:

There are two reasons why a viable party of the populist right, like those in some other European countries, has not appeared in Britain. Firstly, our electoral system is less favourable to small parties. Secondly, until now, our populist right-wing parties have been thuggish, utterly incompetent and tainted with fascism. UKIP, whatever else you might think about it, is none of these things.

Many people feel that they are on the losing side of politics. Maybe this is simply frustration about the modern world but it is no less potent for that. A political party has now appeared that can exploit that howl of rage – to the extent that it can do serious damage to the major parties. Similar political movements have appeared elsewhere in Europe. The real surprise is that it has taken so long to happen here.

For a while this is pretty much what happened. First Tory and then Labour voters began to  drift to UKIP. But while I was, for the most part, right when I said that UKIP wasn’t thuggish or tainted with fascism, I was wrong about its incompetence, which it has reached extraordinary levels. Despite some impressive gains, UKIP proved incapable of turning itself into proper political party.

Still, it was unlikely, I thought, that UKIP’s former Labour voters would go the economically and socially liberal Tory party. After all, these are people who want more state, not less. They want the government to do something. Most obviously about immigration but also lots of other things like crime, discipline in schools and corporate excess.

But the Brexit vote changed everything and now that seems to be exactly what is happening. Ex-Tory voters who deserted to UKIP are going back but they are taking their Ex-Labour comrades along with them. Many of the people Labour lost to UKIP during the past 10 years seem to be shifting to the Conservatives. Worse still for Labour, some of them are not even bothering with the UKIP gateway drug and are simply moving straight from Labour to Tory. All of a sudden, the Tories are the party of the working class.

Some of this is due to Labour’s problems but the Conservative Party has ruthlessly exploited the post-Brexit landscape by adopting a new guise. Almost overnight, it rediscovered the interventionist policies it had locked in the closet for 40 years. Out went Notting Hill and in came Erdington.

Has the Tory Party really gone Red? As you might expect, Phillip Blond is pleased with these developments, urging Theresa May to go the whole way with the Red Tory project and not to backslide into Thatcherism as David Cameron did. Whatever else happens, it is likely, as Mark Wallace said, that these new supporters will change the party’s priorities.  The Conservative Government will be backed by people who want controls on immigration but who also want to see the railways and utilities renationalised. That is bound to change the party’s balance.

There is something else fascinating about all this though. Historians will argue long into the future about the extent to which Thatcher and Reagan brought about the deindustrialisation of the 1980s. What is certain, though, is that Britain led the way with the deregulation and free-market policies that went with it. The associated rise in inequality experienced by most developed economies started in the UK, with the other countries catching up later. 
 Chart by OECD

If that is one part of the Brexit story, the Conservatives also took the UK into the single market and lobbied hard for the EU’s eastward expansion. The Britain that the UKIP and Brexit voters didn’t like, the globalised de-regulated Britain, open to immigration, outsourcing, offshoring and foreign capital, is to a large extent the creation of Conservative governments. The Conservative Party is benefitting from a backlash against the world the Conservative Party created. The Tories are reaping what they sowed, albeit not in the sense in which that idiom is usually meant.

For the moment, though, none of this seems to bother the erstwhile Labour voters who are flocking to Theresa May. The Conservatives’ voter grab will almost certainly work this time. Anyone betting on anything other than a large Tory majority would be foolish. But will the Conservatives keep these voters? And if the party goes too Red, might there be a backlash from the free-market types who have been in setting the party’s direction for so long?

Finally, it seems, almost a decade after Phillip Blond first came up with the term, the Red Tory moment has arrived. Or, at least, something like it. If the Conservative Party can find the formula to keep the new voters it has attracted from Labour, the left might find itself out of power for a long time.

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