Our work at the Institute for the Future of Work (IFOW) has been focusing on two major forces of disruption that the UK economy is experiencing. The first, Brexit, will involve a sharp change in the structure of economic activity. Membership of the European Union has shaped the British model of capitalism and the structure, and operation, of core industrial sectors. Factors listed in the World Bank ‘Ease of Business’ index are a stark reminder that the UK’s high current rating is linked to near-frictionless trade and investment flows with the European Union. Whichever form Brexit takes, this is set to change.

The impact of technological disruption is less immediate but nevertheless drives a different sort of structural transformation. In the longer run, technological innovation ought to be our main driver of growth. The positive and negative effects of technological disruption are not, however, evenly distributed across sectors and regions. Research suggests that voting and turnout patterns in the Brexit referendum may well have been linked to this, with communities formerly dependent on traditional manufacturing tending to vote Leave. The relationship between our two forces runs deep.

This blog post discusses how differentials are likely to be exacerbated by the onset of Brexit. As the ‘double disruption’ works together, the challenges will be deeper than those faced by other European countries and will be experienced at an individual, community and national level, inviting a period of policy activism by the government. This will demand critical shock management combined with a range of longer-term policies aimed not only at generating good local jobs in new and growing sectors, but also at supporting worker transition.

Brexit

A no-deal Brexit is likely to cause living standards to fall sharply, with a probable reduction in UK income per capita by around 8 per cent, according to analysis by the CEP. The economic effect of other forms of Brexit are less certain, but the government’s analysis predicts that GDP would be 1.6 per cent lower if the UK remained in the single market compared with 7.7 per cent lower in the WTO scenario over a 15-year period. This will impact individuals mostly through lower wages.

The short-term adjustment process will be profoundly disruptive, especially in the case of a no-deal Brexit. Transitions tend to involve job change or displacement across sectors and regions as resources are reallocated and the economy adjusts to its new structure. Inevitably, this has implications for the skills that employers demand, as well as productivity and salaries. It is concerning that wages and job-related education and training have already been cut in sectors most likely to be exposed by Brexit and therefore are most in need of these policies (CEP, research not yet published).

The UK labour market will be affected in two main ways. First, downward pressure on labour demand is anticipated due to rising trade barriers and a fall in the inflow of foreign investment. Evidence to date suggests this will hit some industries dramatically: manufacturing, retail and transport stand out. These adverse effects will be most severe in the event of a no-deal Brexit. The consequences of other scenarios are less clear but foreign investment and trade flows will almost certainly decrease in the immediate aftermath.

Second, British migration policy is set for an overhaul. The government has proposed a “skills-based immigration system” based on an independent report by the Migration Advisory Committee. The thrust of the proposal is to encourage high skill workers to immigrate to the UK and restrict immigration of low skill workers. In theory, this approach could put upward pressure on the wages of resident lower-income workers. However, potential benefits are likely to be offset by a significant overall contraction.

Technology

Meanwhile, technological innovation continues to affect the UK economy at an increasing pace as costs diminish and rapid adoption continues. This should be good: technological progress increases aggregate productivity and is the main driver of long-term economic growth. Under appropriate conditions, technological innovation ought to translate into higher pay, increased average living standards and a reduction in poverty. But technological disruption has important implications for both regional and wage inequality too: technology grows the economic pie but alters the way in which the pie is cut. Managing a smooth transition for displaced workers, re-distributing resources into growing, more productive industries and redistributing new wealth and benefits are key.

The economic outcomes of workers displaced by technology are a good indicator of current trends and trajectories. Workers in shrinking occupations tend to experience a significant hit to their earnings relative to comparators in constant or growing occupations. The need for investment in human capital to facilitate training, reskilling and other support so that displaced workers can adapt to new lines of work is already pronounced. If and when Brexit kicks in, this need will become acute.

Brexit and technology

The exact manifestation of these shocks, and their interaction, is impossible to predict. But we can identify and map the UK sectors and regions which are already fielding the adverse effects of technological disruption and in the front-line to experience the ‘double disruption’ we have identified. Brexit and technology, acting together, will increase the speed and process of disruption to the UK labour market. Divisions will be exacerbated, whilst the positives of technological change will be muted in the immediate aftermath.

Restriction on immigration may well cause a tighter labour market, increasing the cost of labour and encouraging the adoption of technology. Bank of England intelligence has observed that tight labour markets have encouraged the adoption of new technologies in some sectors, even though the UK has lagged behind its neighbours over the last decade.

But falling inward investment linked to Brexit will dampen this positive emerging trend. The resultant economic contraction is likely to stretch the labour market, exerting downward pressure on wages, and reducing incentives to adopt new production technologies. Increasing trade barriers and the greater administrative cost of trade may erode profitability. The absence of trade agreements is likely to add barriers to the exchange ideas, information and to conducting internationally collaborative work beneficial to technological innovation on a global playing field. Together, this will the hamper adoption and innovation use of technology. The UK’s ranking on the new ‘Global Labour Resilience Index‘ will fall.

In short, recent progress the UK has made with regard to technological innovation, and leadership in AI-related technologies in particular, is likely to reverse.

Conclusion

In these demanding circumstances, how can policy makers cope with immediate demands from the double disruption, whilst reorientating the economy to address the underlying flaws that are the backdrop to the Brexit vote? We think that only bold and targeted policy-making will work. The need to create good new jobs and to facilitate the transition of workers must drive long-term planning. But the immediate area for attention should be critical social, economic and educational support for, and investment in, our most vulnerable communities and countering in-work poverty. This is not a tactical matter. These areas should be prioritised as we reposition good future work to be at the centre of our economy, as we argue here.

A comprehensive, forward-looking strategy aimed at future good work is a prerequisite to addressing the double disruption. Whatever the outcome of Brexit, the best way to start this process is to draw from Germany’s Work 4.0 framework, and initiate a white paper on the future of work.

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Notes:

For full report and sectoral analysis please visit www.ifow.org and read here

The post gives the views of its author, not the position of LSE Business Review or the London School of Economics.

Featured image by Pedro Szekely, under a CC-BY-SA-2.0 licence

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Christopher Pissarides is the Regius Professor of Economics at LSE, a professor of European studies at the University of Cyprus, chairman of the Council of National Economy of the Republic of Cyprus and the Helmut & Anna Pao Sohmen Professor-at-Large of the Hong Kong University of Science and Technology. He was educated at the University of Essex and LSE, and he spent the bulk of his career at LSE. He had long visits in the US universities of Harvard, Princeton and California at Berkeley. Sir Christopher specialises in the economics of labour markets, macroeconomic policy, economic growth and structural change. He was awarded the 2010 Nobel Prize in Economics, jointly with Dale Mortensen of Northwestern University and Peter Diamond of MIT, for his work in the economics of markets with frictions. Prior to that, in 2005, he became the first European economist to win the IZA Prize in labour economics, sharing it again with his collaborator Dale Mortensen.

Anna Thomas is founding director of the Institute for the Future of Work. She was formerly a barrister from Devereux Chambers, specialising in employment law and appointed as a counsel to the Equality and Human Rights Commission. Anna was head of future of work policy for the Future of Work Commission and is a fellow of IPR and RSA.

Josh De Lyon is a PhD student in economics at Oxford University. He is also a research assistant in trade at LSE. He tweets @joshdelyon.