As the UK emerges from the pandemic and businesses look to return to as close to a feeling of normal as possible, John Baron sets out how the UK labour market should adjust now we are no longer in an environment of essentially unlimited EU labour. 

There has been much talk of the inability to fill vacancies in a host of economic sectors. Bosses are complaining, despite ignoring what should be one of the key benefits of Brexit – that wages should rise faster over time given we are now able to fully control immigration. Just as people who claim they cannot sell their house are invariably asking too much for it, bosses who complain they cannot find staff are invariably paying too little. Businesses need to start investing in their workforce more than they have for decades. This may also include investing in technology, with Japan being one example of where such policies have paid handsome dividends.

One of the most tangible and lasting effects of our period of EU membership is the sizable number of people living and working in the UK from the EU. Whilst there has always been movement of people between EU countries, this greatly accelerated with the expansion of the EU in 2004. Only the UK, Ireland and Sweden were 'good Europeans' and chose to put no initial limits on migration from the new accession countries.

What followed was a large increase in the numbers of people moving to the UK from mostly Eastern and Central European countries, attracted by our comparatively higher wages, buoyant job market and use of the English language. These EU citizens quickly developed a well-earned reputation for being diligent, dependable and hard-working. They have made their lives in the UK, add great value to our society and pay their taxes.

However, one important aspect of the EU's 'Freedom of Movement' rules is that member states can impose no controls on the numbers of EU citizens moving to their country. In my experience it was this inflexibility and lack of control that were key factors in shifting the dial on Brexit, rather than immigration per se. It also meant, in effect, that the UK was pursuing an immigration system that discriminated against the rest of the world – an unfair policy which was not in this country's best interests.

Such a policy has had a detrimental economic effect on the country's standard of living. For nearly twenty years the economy has experienced an environment of essentially unlimited labour. This has led businesses to base – and adjust – all their practices and workings around this central organising principle, and has given rise to many distortions.

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One, undoubtedly, is that wages are lower than they would otherwise have been. The earnest studies of pro-EU economists who claim that this pool of unlimited labour has had no effect on wages, however well-argued, simply do not stack up with reality. Indeed, who can forget Stuart Rose's calamitous appearance before the Treasury Select Committee shortly before the EU referendum when he pointed out that a reduction in the availability of labour would drive wages up? At the time, Lord Rose headed up the designated 'Remain' campaign as chairman of 'Britain Stronger in Europe'. To many involved in big business, increasing wages is a bad thing because it merely increases operating costs and cuts profits.

The chickens are coming home to roost for those businesses which allowed themselves to become overly dependent on cheap and unlimited labour, as a combination of the coronavirus pandemic and the end of EU 'Freedom of Movement' rules work in tandem. Instead of complaining about the apparent scarcity of labour, these companies should take several practical steps to address the new reality.

In the short term, and most obviously, businesses need to look at increasing their wages. At a stroke this will begin to appeal to people who have up to now not been attracted by the relatively low wages that reflect an oversupplied market. The rules of 'supply and demand' are eternal and perpetual, applying to wages in the same way they do to house prices.

In the longer term, firms need to put in the necessary efforts to reduce their dependence on manpower, in particular by embracing automation and the opportunities offered by modern robotics, machine learning and artificial intelligence. This will also have the follow-on benefits of creating a cadre of skilled and well-paid people to operate, maintain and further develop this equipment. This, together with greater investment in staff training, will boost our productivity – something many commentators lament without noting that an economy dependent upon unlimited and therefore cheap labour will be less productive.

Big business has disproportionately benefitted from globalisation, but many bosses ignore the fact that large swathes of the population have been left behind and that inequalities have widened significantly. Many cannot understand why people vote for change, which they then label as 'populism'. Little wonder that big business is defending the status quo. Yet the general perception of many middle- and low-income earners is that the present system has resulted in stagnant earnings and declining prospects.

Finally, there will always be the demand for labour from outside the UK. This is where business and Government should work hand-in-hand to modify our immigration system to ensure we can tap into the international labour markets as and when required. Our new post-Brexit system is much fairer than the system it replaced by establishing a much more level playing field for people outside the UK who wish to live and work here. Crucially, it is also controllable in ways that it was not before, so it can be tweaked as required – if Parliament wishes, for example, to grant a finite number of work visas for seasonal agricultural workers then it has the freedom to do so.

When any system adjusts from one reality to another there will be bumps along the road, and the further the pendulum has to swing the greater these initial bumps will be. Our economy's unhealthy and unusual dependence on unlimited labour will take some time to correct, but there will be upsides all around. Foreign NHS workers, for example, make an enormous contribution to the UK but often at the expense of their own healthcare systems – which have often initially invested in their first-class training – when they move to Britain. A new and fairer equilibrium will be to everyone's benefit.

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