A shortage of workers from Europe after Britain has left the EU is threatening the economy with a “major labour supply shock”, according to a report from Deutsche Bank. The report says post-Brexit immigration curbs could lead to higher automation and production – and jobs – relocating abroad, rather than resulting in higher wages for indigenous workers.

'Familiar Brexit narrative' dismissed

Written by Deutsche Bank macro strategist Oliver Harvey and chief economist Mark Wall, the report dismissed the “familiar Brexit narrative” that a drop in immigration will force companies to pay British workers more.“While attractive for its simplicity, this narrative ignores some important considerations,” the report said. “The first is the link between productivity and wages.“Wages cannot be raised sustainably above productivity without higher inflation. Otherwise, the labour costs of businesses will rise at the expense of profits.”The authors said that the best-case scenario was that a labour shortage would push up productivity, but that was likely to be achieved by an automation boom in Britain, which has the lowest density of robots per manufacturing employee among G10 nations.

Services sector also vulnerable to automation

Even the UK's services sector, which accounts for more than three-quarters of the nation's GDP, was susceptible to robotic replacement, with algorithms able to replace workers in customer services, administrative and secretarial roles, the report said.The worst-case scenario, the authors added, could see companies move overseas if faced with higher labour costs. “Companies faced by higher labour costs would simply offshore production rather than make investments. This would be bad for labour in aggregate, as output and employment would disappear with no compensatory improvement in real wages,” they said.“Putting one and two together, the conclusion is that UK companies exposed to foreign competition have limited ability to raise wages in response to a labour supply shock. Margins aren't high enough to absorb higher labour costs, and international competition will limit the ability to raise prices.”

Record high employment rates

With the latest government figures showing record high employment rates in the UK and with data showing that, since the EU referendum last year, the number of workers arriving in Britain had fallen, the report said that the situation could only get worse with a post-Brexit ban on freedom of movement.“A confluence of factors will exacerbate the effect for the labour market,” says the report. “First, immigration has papered over weak domestic demographics. Growth in the labour force has been entirely due to foreign workers in recent years, and these added the lion's share of jobs growth since the financial crisis.”Secondly, the authors say, slack is very much lacking in the British labour market at the moment. On a basic level, a labour market with slack in it is one where there are more workers than there are jobs, while a tight market is the other way round.The report says that Japan should serve as a warning for those who believe a tighter labour market should automatically raise wages, noting that Japanese employers have been reducing hours rather than increasing take-home pay. For related news and features, visit our Brexit section.Access hundreds of global services and suppliers in our Online Directory  Get access to our free Global Mobility Toolkit

©2024 Re:locate magazine, published by Profile Locations, Spray Hill, Hastings Road, Lamberhurst, Kent TN3 8JB. All rights reserved. This publication (or any part thereof) may not be reproduced in any form without the prior written permission of Profile Locations. Profile Locations accepts no liability for the accuracy of the contents or any opinions expressed herein.