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Sunday, December 17, 2017

Brexit, stagnant earnings and globalization

The British vote to leave the European Union was motivated by several factors and in nearly two-thirds of the seats held by the Labour Party (and in no less than four-fifths of those located in the North of England and the Midlands) a majority of voters voted to leave the EU − but across Britain as a whole, 63% of those who voted Labour in 2015 and who cast a ballot in the EU referendum, voted to Remain.

The Economist was more specific on how immigration impacted the vote: "Where foreign-born populations increased by more than 200% between 2001 and 2014, a Leave vote followed in 94% of cases. The proportion of migrants may be relatively low in Leave strongholds such as Boston, in Lincolnshire (where 15.4% of the population are foreign-born). But it has grown precipitously in a short period of time (by 479%, in Boston’s case). High levels of immigration don’t seem to bother Britons; high rates of change do." 

Last December, Mark Carney, governor of the Bank of England, recalled in a speech in Liverpool when “it was in the midst of a golden age; its Custom House was the national Exchequer’s biggest source of revenue. And Karl Marx was scribbling in the British Library, warning of a spectre haunting Europe, the spectre of communism. We meet today during the first lost decade since the 1860s.”

Last month the Institute of Fiscal Studies, Britain’s leading financial think-tank, said that in 2008, the median worker in the UK (i.e. the person for whom half of workers earn more and half earn less) working full time had an annual salary of £24,500 in today’s prices. Today, a decade later, the median worker working full-time earns £23,000, still £1,500 below the pre-crisis level.

“A decade without the nation’s workforce getting a pay rise is extremely disappointing, but the forecasts now imply that sluggish increases could be the new normal. Real wages are due to be flat next year, and even in 2022–23 average earnings are due to be below where they were in 2007–08. That implies a lost decade and a half of wage growth, an unprecedented period of stagnant earnings in the UK.”

OECD data on average earnings for a full-time or full-time equivalent employee, show that among rich countries, the UK, Italy, Greece and Iceland had lower levels in 2016 compared with 2007.

Mark Carney spoke of “the disconnect between economists and workers. The former have not been sufficiently upfront about the distributional consequences of rapid changes in technology and globalisation. Amongst economists, a belief in free trade is totemic. But, while trade makes countries better off, it does not raise all boats; in the clinical words of the economist, trade is not Pareto optimal. Rather, the benefits from trade are unequally spread across individuals and time. Consumers get lower prices and new product varieties, and, overtime, benefit from the spur to innovate and higher productivity. Some workers, however, lose their jobs and the dignity of work, or see their ‘factor prices’ – in plain English, wages – equalised downwards.”

What is good for London may not be for a depressed region in the North of England. The cost of housing in the capital city does not promote mobility. 

People who work in areas of the US most affected by imports typically have greater unemployment and reduced income for the rest of their lives, according to research led by David Autor, a professor at the Massachusetts Institute of Technology (MIT). However, overtime automation has had a far bigger effect than globalization and would have eventually eliminated those jobs anyway.

“Some of it is globalization, but a lot of it is we require many fewer workers to do the same amount of work,” he said. “Workers are basically supervisors of machines.”