One of the big areas of concern for a post-Brexit Wales will be the ability of the labour market to deliver intrinsically rewarding and well-remunerated jobs for the workforce in the future, says Professor Andrew Henley. Here he assesses the current state of play and considers the impact of a ‘hard’ and ‘soft’ Brexit for Wales, and concludes that regardless of the type of Brexit to emerge, Wales needs to continue to invest heavily in the skills of its workforce.

The Welsh Government line on recent Welsh labour market statistical data has been that the labour market here is outperforming that in other parts of the UK.

The latest numbers up to February this year suggest that, despite higher unemployment, Wales is outperforming the rest of the UK in terms of a faster reduction in the level of economic inactivity. After several decades of dealing with the problem of high economic inactivity, jobs in Wales are now being created at a slightly faster rate than in the rest of the UK.

But the picture after Brexit could be very mixed. For exporters based in Wales the fall in sterling has made business more competitive. And for businesses reliant on the domestic market, at least at the moment, consumer confidence has been holding up.

However, business confidence in the UK government’s ability to get a Brexit settlement, which will maintain good trading and economic development opportunities for Wales, could easily become unsettled. If that happens then the fragile upturn in Welsh labour market data could soon evaporate.

Analysis of last years’ Brexit vote shows that concerns about the locus of political control and of high rates of in-migration were at the forefront when people decided how to vote. In Wales, voters did not perceive sufficient economic benefits, in terms of jobs and prosperity, from European regional development spending to persuade them that staying in the EU was worthwhile.

Wales in ‘hard’ Brexit

A “hard” Brexit, which imposes tight controls on future in-migration of less-skilled workers could be very bad news for the Welsh economy. Average earnings and skill levels in Wales are well below the UK average, and many sectors of the economy here, like tourism and hospitality, the personal care sector, and food processing, rely on the availability of low-paid labour.

On the one hand a shift in the balance of demand and supply in the labour market might see real wages edging up. This will be good news for households in work who have seen little or no real increase in take-home pay over the last five to 10 years.

On the other hand, business models will need to adapt quickly if employers are to respond. For some sectors that might mean greater reliance on automated processes, such as those found in big city budget hotel chains. In other sectors, where there is a reliance on close-to-minimum-wage labour, some employers might shut up shop due to the squeeze on profitability.

Inevitability therefore, the structure of employment will change. New skills will be needed, and public funds for skills training will be needed. It is worth remembering here that for the last 17 years Wales has largely relied on EU structural funds to pay for this upskilling and reskilling.

Wales in a ‘soft’ brexit

A “soft” Brexit, which continued to allow employers in Wales to hire workers from outside the UK as they need them, regardless of skill level and pay, might disappoint some who voted Brexit. But it might afford less economic damage in Wales, particularly if it is coupled with a robust approach to promoting the payment of a living wage.

Research commissioned by Welsh Government at time of the accession of new EU member states in Eastern Europe, suggested that in-migration from these countries was having no adverse impact on the Welsh economy, either in terms of creating unemployment or depressing earnings for local people. If therefore, the UK is able to maintain tariff-free access to its current markets and if consumer and investor confidence holds up then there is little reason to think that the conclusions of this research from eight years ago will have changed. As Professor Calvin Jones has commented in an earlier blog post, Wales is very heavily reliant on the European market for trade.

Self-employment and preparing Wales for Brexit

Since the banking and financial crisis, a large proportion of the jobs created over the last nine years has been in the form of self-employment. This has worried many commentators who view self-employment as an expression of the increased “informalisation” of the labour market, and who do not see self-employment as indicative of the growth of micro-businesses, some of which one day might turn out to be innovative and wealth creating.

On the basis of my own research I am somewhat less concerned that the growth in self-employment reflects a lack of “good jobs”. The majority of people report that they choose self-employment due to the advantages provided in terms of a sense of independence, or the opportunities associated with starting out on your own.

Other recent research also shows that people choose self-employment, other things equal, where their local economy is doing well. Despite historically high levels of self-employment in areas like rural Wales, the fastest growth has been in London and the South East. As such the recent growth in self-employment will not really help Wales in terms of preparing for Brexit, because Wales, comparatively speaking, currently offers less opportunities for successful business start-ups. In fact many local authority areas in Wales, particularly in the Valleys and poorer urban centres, have levels of self-employment well below average.

The Productivity puzzle

One other feature of the economy threatening the success of the post-Brexit economy, and which is leaving economists and statisticians puzzled, is the UK’s poor productivity performance since the financial crisis.

Productivity, roughly speaking, measures the value added in terms of goods and services produced by a worker. It is productivity growth that allows for real wage growth, although it is far from clear which causes which. Businesses must be productive to be able to afford pay rises. On the other hand, pay rises, as demonstrated in recent Cardiff Business School research on the living wage, motivate employees and reduce workforce turnover. So productivity improvement relies on investment and R&D activity by firms, but could be depressed by low wages.

Here again, Wales is particularly vulnerable, and past experience offers little comfort. Brexit, particularly a ‘hard’ Brexit, might cause some ‘shake-out’ of the poorest performing firms. But very recent research shows that city regions in Wales have over the long term been very poor at achieving productivity enhancing structural change compared to the best UK performers.

Therefore, regardless of the type of Brexit to emerge, Wales needs to continue to invest heavily in the skills of its workforce.

This means negotiating b udgets with Westminster once EU structural fund allocations have gone.

It also means giving careful consideration to configuration of skills that will be needed in the medium to long term. That means preparing for the onward march of the digital economy, and equipping people and businesses to take advantage of internet infrastructure. This has to take place across the economy and not just in the so-called “leading sectors”.

It also means continuing to work hard to overcome the inherent disadvantages faced by people in Wales, compared to more successful UK regions, when wanting to set up their own business.

Finally, it means working innovatively to achieve productivity growth by attracting value-adding industry and by getting “laggard” firms to perform at the same level as the best in their sectors.

Andrew Henley is Professor of Entrepreneurship and Economics and Director of Research Engagement and Impact at Cardiff Business School.

This post represents the views of the author and neither those of the Welsh Brexit blog, nor Cardiff University.