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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10 Responses to Brexit: Are we facing a workforce crunch?

  1. Florence says:

    Surely the underlying problem for the UK born workforce is the housing crisis? If there are jobs, people will move for them but there has to be affordable – properly affordable housing – to move into, and wages that will sustain a family too. The current problems with the economy built on immigration are those of low wages and even lower quality, sub-standard, overcrowded accommodation immigrants may endure while working here temporarily.

    There is no point looking to the over-65s to fill the gaps, because they are usually the most invested in their lives and homes and least able to move to work. Indeed as one of them, i find it shocking you would even consider this – because we all know you’re not talking about the office jobs and public sector roles, but the unskilled, back breaking long hours and low pay that is typified by the immigrant-dependant business model.

    You also fail to include factors such as the number of jobs being taken by AI and robots, small now, but likely to bug significant in a very short time. The UK is falling behind most other developed nations in this too, because it is still bound to the immigrant model, and low investment and low wages.

  2. Dipper says:

    This is good news. The UK economy was heading down a dead-end, with an unsustainable economic model that required ever-increasing supplies of workers yet failed to generate enough revenue to support it.

    Take (per my comment from last post) the fact that in 2015 25% of babies born were born to mothers born outside the UK. That means by 2020 one in four primary schools are there for the children of immigrants, one in four primary teachers is teaching a class of immigrant children, one in four beds in children’s hospitals are taken by children of immigrants, one in four paediatricians are looking after children of immigrants. To Florence’s point, It is no wonder we have a housing crisis.

    This level of immigration might not be a problem if it delivered, but wages are down, and the deficit taking a very long time to fix. Much employment is of such poor value that it has to be subsidised by the government.

    What we need to do now is reshape our economy to cater for a restricted supply of workers and concentrate on improving productivity. This is going to be hard, but better to address this problem now with a population of 65 million than in 30 years time with a population of 80 million.

  3. 1 says:

    No, we’re facing people who want to murder us…….c’mon you clever chap…….where to do stand…laws and action to protect to the public (within the law)….or well……which side are you on……..

    • Rick says:

      Well this one qualifies for the Wazzock of the Week award. EU migration has nothing whatsoever to do with terror attacks.

      • gunnerbear says:

        If we don’t leave the EU we’ll never be able to control immigrant and Germany is keen on handing out German passports to all and sundry….but yes, you’re right, I should’ve phrased my reply a bit better. 🙂

  4. Blissex says:

    «restrictions on migration would almost certainly lead to a shortage of labour»

    Under an Ayn Rand style approach like this there has always been a shortage of labour: most workers have wages above subsistence. Only if the worker at the marginal wage is just on the edge of starvation there is no shortage of labour. If prevailing wages are significantly above the starvation level, there is significant worker income surplus, and the existence of a rent component in worker incomes means that workers are exploiting business owners thanks to a shortage of labour, or the extortion power of organized labour.

    Put another way, it is quite absurd to call a “shortage” of labour without reference to wage levels and other economic conditions.

    Consider the time when 30-40% of the workforce were house servants, paid with board and lodging (“downstairs”) and a tiny weekly allowance, the time which A. Christie described, as a middle class person as she was at the time, as “I never imagined that I would ever be too poor to have servants, or rich enough to own an automobile”.

    Obviously today there is a huge shortage of labour, because millions of servant jobs in middle and upper class households are going begging.

    Put another way, this article can be summarized accurately as “Nowadays it is hard to find cheaper help”, which has been and will always be what business and property owners say.

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  6. thenextwavefutures says:

    I’m curious about the assumptions in the Mercer models on whether employer investment would increase in the face of shortages–which might solve some of the potential shortage through productivity gains.

  7. Blissex says:

    There is also a qualitative proxy for “labour shortage”, and it is the T&C of labour contracts. Like in all fields when a side has the upper hand in negotiating power the T&C shift in their favour, not just the price; indeed usually the T&C shift before the price, because the other side tends to fight harder over the price than the T&C. This happens to bond covenants, to house renting, etc.

    My impression is that T&C for labour contracts, especially at the lower end of the wage range, have been shifting ludicrously in favour of employers, little by little, with the obvious example being ZHCs and the switch to fake self-employment, which put all the risks and costs of flexibility onto the side least able to afford that, the employee; in the USA also the introduction of extreme non-compete T&C even on very low wage employees. I would also add the enormous fall in the pension contributions (and severance payments), well documented by this blog in a previous post, even if it is actually a fall in price, as most employees only look at the headline number as the “price”, and consider the pension promise (and the severance promise) as part of the T&Cs.

    Note: there are obvious exceptions, for example the T&C of CEO and executives have been becoming ever more favourable to the “employee”, most notably as to the fantastic severance packages they get.

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