Thursday, 22 September 2016

Move on up

Does anyone remember "Auf Wiedersehen, Pet"?  It was a comedy-drama in the 80s about a group of British building site workers who ended up working in Germany due to a slump in the UK building trade.  You wouldn't film it today because UK workers have full working rights in the EU, meaning that there is less comic potential in the itinerant circumstances that faced the characters and even less in the cultural exchange between Newcastle and Düsseldorf.  Having said that, any TV commissioners out there might want to look at a remake in the next few years.  If the UK ever experiences a prolonged recession the likely locations of a reboot might be India or Malaysia.  After all, if David Davis has his way these countries might soon be our closest trading partners and, as a consequence, the most likely destination for British workers seeking employment abroad.  I can help out with the script:  replace all jokes about pickled gerkhins with pak choi and you are good to go.  It would also be hilarious if Moxey got over his stutter in fluent Malay but still stumbled over his words in English. Ho ho ho.


This post is about the freedom of movement of labour in the European Union.  It seems more certain than ever that the UK government believes it has a responsibility to end EU migration.  In my previous two posts about post-EU trade deals I looked at how they might compare with the EU in terms of "control" and effectivness. I'm not particularly concerned about taking back control but if you are then the news is bad:  trade deals inherently involve giving up control. Just ask Canada, now the most sued country in the world under free trade tribunals.  It is also believed that a significant stumbling block to TTIP was that the EU didn't want to leave itself open to investor-state disputes.  Questions of control aside, I am most definitely worried about the effectiveness of replacing European trade deals with Malaysian and Australian ones.  We should by all means pursue further agreements but let's not chuck out our metaphorical veggie burger and potatoes just because we want to add some quinoa to our plate.  The elephant in the room in all of this has been the freedom of movement of labour in the European Union.  Trade deals don't necessarily result in workers moving house so why has the EU gone down this path? Why would anyone sign up to such an agreement?  Please read on and find out. And then be worried.

If you are a regular reader of this blog you will already know that NAFTA led to US jobs offshoring to Mexico.  Not a regular reader?  Get with it, Grandad, this is where the cool kids hang out!   Membership of the EU hasn't really led to much tabloid scandal about jobs offshoring to Bucharest because this hasn't happened at any scale.  Instead there has been a boom in UK businesses that rely on a plentiful supply of workers from Poland and other countries in the EU 8. The difference here is that EU workers are allowed to live and work in any EU country, while workers in NAFTA nations need to stay at home.  Under these conditions, offshoring US jobs to Mexico is almost inevitable because businesses that don't take advantage of efficiency savings tend not to stay solvent for too long.  Similarly, it is almost inevitable that Eastern European workers turn up en masse in Boston, Lincolnshire because they can earn a higher hourly rate there than at home. For business owners in the UK this supply of labour can propel all sorts of propositions over the efficiency hump without the risks and initial costs of relocation.  The UK Treasury is a winner too because they get a share of the profits through taxation. From the UK perspective this is a win-win deal:  businesses haven't started an offshore stampede; they pay tax on profits; and nothing stops any of these businesses employing local workers as vacancies arise. How about in Warsaw?  Have they lost the deal?  No, it turns out they haven't lost the deal, either.  In the following graph you can see that unemployment in Poland fell and approached the EU average in the years leading up to the global financial crash.  It surely isn't a coincidence that unemployment started to fall very quickly just as they joined the EU.

Poland joned the EU in 2004.  Unemployment fell quickly in the following years. 
Falling unemployment in Poland is good for the Polish Treasury because they don't need to spend money on umemployment benefit.  Moreover, falling rates of unemployment should surely result in upwards pressure on Polish wages.  Are Polish wages steadily increasing or not?  Let's see.

Polish wages continue to rise.  Source: http://www.tradingeconomics.com/poland/wages
It seems that Poland and the UK are both winners as a result of their membership of the EU.  Key to their success was the freedom of movement of labour.   Hurray for us, we all get to be winners in this race.  Political correctness gone mad, if you ask Nigel Farage.

So far, we've focused on so-called commodity businesses but what about businesses that rely on product differential?  Hah, I just threw in some economics buzzwords to make me look clever.  Post-neo-classical endogenous growth theory!  If you run a business then there are really only a few strategies you can follow if you want to make money.  The first is to drive down manufacturing costs so you can win market share on price alone.  A business engaged in that kind of race might be called a commodity business. If you want to get really rich then I'd recommend not going down that route.  It's far better to do something that nobody else can because then you can invoke scarcity value when pricing your luxury goods.  Companies like Apple and BMW make luxury products that rely on differential when they price and market their products.  The problem is that today's high-end technology is tomorrow's commodity. As you might imagine, maintaining a differential strategy is really, really hard.  Maybe you had a genius idea back in 2013 but you're going to need to repeat that every day of every month of every year if you want to stay ahead of all the copycats.  Just ask IBM, who eventually had to sell their ailing PC business to a Chinese manufacturer.  Back in the 80s they were the trailblazers of the PC industry.

A differential business needs a constant supply of creative and educated people.  If that tap turns off it is likely to end up struggling as a commodity business.  When that happens everyone can wave goodby to booking Lady Gaga for the annual office party.  Cheer up, though, I heard that The Reynolds Girls are still available at very reasonable rates.



The UK government really likes the idea of being a hub for differential businesses because huge profits mean huge tax revenues.   Doing something that nobody else can and perfecting it faster than everyone else and repeating that year after year requires rapid recruitment of super-smart people who have very, very specific skills.  Actually, they might not be super-smart but they will most definitely have very specific skills.  Let's say you want to recruit 20 software developers with expertise in multi-threaded, interactive-rate simulation in heterogeneous computing environments.  They also need to have a working knowledge of graphics hardware pipelines and basic ukulele skills.   If you do want to recruit somebody like that then please give me a call because I might just be in the market for a new job.  Really, please do give me a call.  A business like that is obviously going to struggle if the pool of potential workers is small.  After all, it takes a special kind of loser who can put that kind of nonsense on their CV and not immediately kill themselves out of shame.  The likelihood is that matching candidate and employer is going to be hard and will involve looking around the European Union.  Do you think it will get harder or easier for UK businesses to attract specialist skills after the door is slammed on the EU?  That's right, it will get harder.  Moving house to a new country is not very attractive for most people but it becomes a lot less attractive if your right to work is coupled to your employer, as it is in Canada, the US and the EU (for non-EU workers).  I've already touched on this in previous posts with a number of not-hilarious personal anecdotesIn summary, slamming the door on EU workers but then telling them they can still come if they accept second-class employment rights is not going to prove a successful strategy.  The government might as well forget trying to develop London as a hub for social media start-ups because they will just move to Berlin, where they have the added advantage of cheaper rent.  This is even worse than offshoring because a business that offshores at least needs to be onshore before it can offshore.  In effect, the Leave campaign has offshored all our potential.

Life is going to be hard in the UK after the door is closed on EU workers.  Commodity businesses will struggle to recruit local workers as a replacement for EU workers.  To maintain their workforce at all they will need to increase the hourly rate and put up prices to match their costs.  This is not good news for a commodity business.  You might argue that it is good for British workers because they will enjoy a higher hourly rate.  I'm afraid that doesn't really work, though, because the competitive pressure to offshore to our new partners in Kuala Lumpur might really mean increases in unemployment.  When that happens UK workers can't just jump on a plane to Germany or Austria to take advantage of vacancies there.  Remember, the door slams in all directions.  Differential businesses are really going to struggle, too, due to a lack of access to specialist skills.  If the struggle is too great they will quickly become commodity businesses and we already know where that ends up.

The arguments against freedom of movement of labour in the UK are often grounded in concerns about the way population increases are managed.   "Creaking-point", "crisis levels", and "over-crowding" are words that you often heard from Leave campaigners.  These problems really arise from a lack of attention to UK infrastructure.  If more people are paying tax to the UK treasury then where is all  this money going?  Why is not being spent on schools and hospitals and roads and homes at a rate commensurate with the population growth? Was the EU referendum really about deficiencies in UK town planning?

Over and out,

Terry

PS  This is my last post about trade deals for a while.  Thank goodness for that.  In truth, even I'm relieved it all came to an end.  Growing a huge beard and tending to bees in a rural retreat seems suddenly very attractive. 

PPS More posts about "EU or UK?" in the pipeline but where is that indyref2?  I'm going to run out of topics by March, 2019 at current rate.  What will I write about then?








6 comments:

  1. I've been arguing for sometime that the 'pressure that immigrants put on the local services' argument is rubbish.

    Most, indeed almost all, European immigrants are here to work, and how they work!

    They are paying council tax and income tax. How can they be putting a strain on local services?

    Furthermore most of them are relatively young and healthy. A Bulgarian friend of mine was in Scotland for 4 years and never once went to a doctor or dentist.

    By contrast there is a disproportionate number of older British people living in the warmer countries of the union and requiring medical treatment, although they too will pay local and purchase taxes, so why wouldn't they claim these services.

    I read the other day that there are worries about the massive construction projects about to go ahead in England if freedom of movement is halted: the multi billion pound spends on rebuilding their parliament, the queen's palace and the railway to Birmingham/Leeds/Manchester or wherever.

    Where, they wonder, will they get the craftsmen and skilled labourers they require to do these jobs without importing labour from the EU.

    Of course the government can issue temporary visa for Hungarians and Poles to come build their parliament, palaces and railway, but how will they explain the continued masses of foreigners 'putting a strain on the local services', if they do so...?

    The government itself, for years, blamed the EU for so many problems. They often lied about them. The right wing rags joined in the fest of hate and blame, hiking up the rhetoric during the EU campaign to ridiculously hysterical levels.

    Farage even managed to be photoshopped into a picture of refugees fleeing the war in Syria, with the inference that it was the EU's fault that these people were coming here. Even when they weren't.

    And stupid people voted, not about trade deals or farm payments, but about the hatred they feel for someone who isn't British. A hatred which is largely due to the gutter press and the rabid Brits in government and, of course, UKIP.

    Still, as all these big projects are in England and for the English, I don't actually give a stuff.

    If their railway never gets built it will be better for Scotland as its purpose to encourage people to invest in "Up North" rather than in Scotland which will be as ridiculously inaccessible from London as ever.

    If the Houses of parliament fall into the Thames and take the wasters with them, I don't give a stuff. And if Buck House falls down because they used forced dole labour on it, well I'm not likely to be in it when it does.

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  2. I agree the argument doesn't hold water. Most EU migrants are of working age, in good health and statistically more likely to be in work than a UK citizen. They are also less likely to stay when they hit pensionable age so will be less of a cost to the NHS in their dotage. I don't really like having to make economic arguments to justify immigration because it is just better when people from all different cultures rub along together. I don't want to sink back to the 1950s of Morrissey's fantasies.

    I also suspect a level of xenophobia is at work here. This is the most troubling issue of all in the Brexit debate. It is also the reason why I busied myself with DIY jobs during the last weeks of the referendum campaign so that I could try to ignore it. Horrible stuff.

    It looks like the EU has gone some way already to accepting the Swiss fudge on encouraging local applicants. The wording is a huge, huge fudge with caveats aplenty. The open question is whether the EU amends the rights of Swiss workers with similar fudging. No talk of that right now.

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  3. Where did all the extra tax go? Simple really it was used to reduce the top rates of income tax and lower corporation tax for their rich buddies. Same as the oil wealth squandered on the same thing.

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    1. You're absolutely correct. Is it just me or is this point actually too depressing to say out loud?

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  4. http://wingsoverscotland.com/the-squandered-bounty/

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    1. Thanks for the link. That is an excellent post, as usual. The thought of missing out on the renewables boom as well is just too awful to contemplate.

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