After Brexit: Wages and the Economic Reality

The belief that removing labor elasticity from the market will lead to wage increases is a classic example of right-wing fantasy economics. While there may be initial wage increases due to labor shortages, the long-term reality is that wages will likely fall, making the United Kingdom less competitive on the global stage. This article explores the intricate dynamics at play and the realities faced by both workers and employers following Brexit.

Understanding the Immediate Impact on Wages

Brexit has significantly altered the labor market dynamics. Instead of the influx of immigration that was previously commonplace, there is now an increase in illegal immigration. This scenario creates a more complex and less predictable labor environment for British employers. As a result, employers no longer have the obligation to provide competitive wages to attract workers. This shift can be detrimental to British workers, as they now face the challenge of fewer job opportunities due to reduced labor mobility.

One possible immediate effect is a rise in wages to fill vacancies. However, this increase is likely to be short-lived, lasting only a few years while workers undergo the necessary retraining to fill new positions. Yet, this raises the question: where will these trainees come from? The options are limited, and many redundant workers might need to retrain for entirely different jobs, such as transitioning from manufacturing to caregiving, or adapting their skills to more labor-intensive tasks like strawberry picking.

The Long-term Economic Consequences

The reality of wage increases due to labor shortages is often misinterpreted. While wages may see a temporary lift, this does not equate to improved economic conditions for the average worker. Instead, the ultimate outcome may be a combination of increased prices, reduced services, and even higher inflation.

When wages increase, costs for goods and services also rise. This inflationary spiral means that families may find themselves unable to afford the same quality or quantity of services and goods as before. Possible outcomes include:

The employees must accept lower wages to maintain their standard of living. Employers may opt for redundancies to manage increased costs. Some businesses may have to cease operations due to financial strain. An exacerbation of inflation, leading to a downward cycle of wage and price increases.

The net effect is a potential plunge in the standard of living for many British families. The illusion of higher wages is often just that – an illusion that masks the real economic challenges.

The Taxman's Perspective

Despite the difficulties faced by workers and employers, the tax system may benefit. With wage increases, workers will pay more income tax. Furthermore, as prices rise, the value-added tax (VAT) on goods and services will also increase, meaning workers will pay more VAT on the same products. This contributes to the taxman's coffers but does little to alleviate the economic burden on the average citizen.

Historical Precedents

To understand the potential outcomes, it is instructive to look at historical precedents. The 1970s saw inflationary pressures and wage increases, but the overall effect was a decline in the purchasing power of workers. In the long run, having more money that buys less results in a less favorable economic environment.

Experience from the 1970s highlights the futility of relying on increased wages as the sole driver of economic prosperity. Instead, a balanced approach is needed, one that considers labor mobility, skill development, and sustainable economic growth. The current scenario post-Brexit underscores the importance of addressing these issues proactively rather than waiting for the inevitable negative consequences to set in.

In conclusion, while there may be some initial wage increases, the long-term economic impact of reduced labor mobility and increased costs will likely lead to a decline in the standard of living. The United Kingdom must carefully navigate this period of transition to ensure a more sustainable and prosperous future for all its citizens.