Moving to a "high-wage, high-skill" economy in a post-Brexit UK

By Professor Bernd Brandl, November 2021

The UK's departure from the European Union has resulted in numerous assurances of an upgraded economy. Professor Bernd Brandl investigates the reality of how this transition will impact businesses and their workforce.

Boris Johnson has recently promised that the government will show more "guts" than any before, by moving the UK "towards a high-wage, high-skill, high-productivity economy" in which "everyone can take pride in their work and the quality of their work".

At first glance, this announcement appears to be good news for low-wage and low-skill workers. But is it also good news for businesses and isn't there a hitch for workers?

To answer the question, you have to understand that businesses have to operate as cost-effectively as possible in order to be able to compete in national and international markets. For many companies in the UK, the ability to pay low wages to workers is essential for their competitiveness and therefore for their survival. If companies are not competitive enough, businesses will go bust and workers will lose their jobs.

Over many years, many companies in the UK were very successful and prospered by relying on a low-wage and low-skill workforce. There were few incentives for companies to increase wages and almost nothing prevented them from lowering wages.

There are two main reasons for this. Firstly, in the past decades there was a constant influx of migrant workers who were willing to accept low(er) wages; secondly, apart from the minimum wage, there was almost nothing in place that prevented companies from keeping wages low.

For example, there were no encompassing (e.g. sector-wide) collective wage agreements in place to prevent companies from dumping wages in order to gain a competitive advantage. In fact, companies were allowed to compete with each other on the basis of lowering wages; furthermore, there were far fewer incentives for companies to compete and prosper on the basis of new and innovative technologies that need a high-skilled and high-paid workforce.

In other countries, for example in Scandinavian countries, encompassing collective wage agreements exist which establish high(er) wages and working conditions for all companies in the same way, and therefore companies are not able to compete on the basis of wages. So, to gain a competitive advantage and make profits, companies that fall under encompassing collective agreements are 'forced' to invest in a productive and high-skilled workforce to survive.

UK companies have not had the same pressure to invest in the skills and productivity of their workers, as they were allowed to rely on low wages. In fact, companies in the UK were even able to import cheaper labour instead of investing in a skilled workforce to increase productivity. The lack of encompassing collective wage agreements is certainly one important reason why the British economy can be described as a "low-wage, low-skill, low-productivity economy".

On the one hand, this means that the British economy is made up of a large share of low-wage and low-skill workers; on the other hand, this business model ensured that British businesses prospered and workers had jobs.

However, this model is now under threat from the new economic vision of the prime minister. This vision looks to replace mass immigration with higher wages and better conditions, to encourage people into key sectors in order to keep the British economy moving "towards a high-wage, high-skill, high-productivity economy" in which "everyone can take pride in their work and the quality of their work".

Now, the question is: Will this transition work, and to make it work will it take only "guts" or is more needed?

For many years I have been investigating the question of why in some countries we find a "low-wage, low-skill, low-productivity economy" business model, and why in others "a high-wage, high-skill, high-productivity" business model. In particular, I have investigated the role and effects of differences in collective wage bargaining systems on wages, skills and productivity. In this context, I have also been looking at how a transition from one model to another can succeed, and how long and 'painful' a transition can be.

So, what can I say about the success of the prime minister's economic vision to move the British economy "towards a high-wage, high-skill, high-productivity economy", in which "everyone can take pride in their work and the quality of their work"?

Firstly, it will take a lot of patience, as the transition will take time. While for some sectors the transition might succeed within a year, for many other sectors the transition is likely to take many years if not more than a decade. Certainly, a key factor in the speed of transition will be how well the government manages the transition. For example, the training of a large number of HGV drivers could be realised within a few years, but this depends upon how well training is organised by the government and/or by business organisations, such as the Road Haulage Association (RHA) in this case.

Secondly, the transition will be costly, as new institutions and structures (e.g. training facilities) need to be established.

Thirdly, if the institutional and organisational framework that generates a high-skill labour force takes time to develop, the transition will be painful as job losses and economic disruptions are likely to occur. In fact, many companies will not be able to afford to pay higher wages and will go bust. Therefore job losses are inevitable in the short run. This in turn, might lead to costly industrial conflicts, including strikes and protests, that damage the economy further. So, the transition is likely to lead to economic disruption and potentially also to social unrest in the near future.

Will "low-wage, low-skill" be gone forever?

No, not at all. In the short run, jobs in low-productivity companies that cannot afford higher wages will be lost, since these companies will be pushed out of the market. However, such job losses are likely to be temporary, since more successful and more productive competitors can take over the market share and re-employ workers. If encompassing collective agreements also ensure that equal wages and working conditions are established for all companies in a sector, the overall effect would simply be the replacement of jobs in low-productivity companies with jobs in high-productivity companies. This further implies that there will be an overall positive effect on the productivity of the British economy in the long run.

Against this background, it takes a lot of "guts" for the government to initiate this move, as voters in the next election might go to the ballots on the basis of the short-term pain they are already experiencing instead of fully considering the long-term economic gains.

More information on Professor Brandl's research interests.