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Will Brexit increase British wages?

By Blog Editor, IOE Digital, on 17 June 2016

Alex Bryson and Michael White
Has the employment of non-UK workers – particularly those from the European Union – reduced wages in Britain, and if so, by how much? Could restrictions on the employment of EU workers benefit British employees by driving their wages up?
Our research shows that  …
– The reduction in wages when using European Economic Area (EEA) workers (most of whom are from the EU) is quite small.
–  Any wage rise from a restriction on EU workers could be cancelled out by using the same numbers of temporary or agency workers. These have virtually the same small effect  in reducing wages as does the use of EU workers.
– Wage reductions are considerably greater where employers use workers from outside the  EEA, than when they use EEA workers.  Substituting EEA workers with workers from other parts of the world, if allowed by future UK governments, could drive wages down.
The background
One of the arguments put forward on the Brexit side of the Referendum debate is that the current employment of EU nationals, who have the right of free movement in the EU, pushes down wages. So by restricting the employment of workers from the EU, wages in Britain can be increased.
The economic argument is straightforward: with fewer people available for jobs, firms have to increase their wage offers to get workers (at least in the short run).
The evidence
We use information about workplace employment and wages provided by managers responsible for personnel, as part of the Workplace Employment Relations Survey of 2011.  This survey is representative of British workplaces with at least 5 employees.
We analyse information from 2100 workplaces, both private sector and public sector.
From the information supplied, we calculate the median average wage for each workplace.  This is the ‘middle’ wage that has half the employees earning more and half earning less.
We also have information about the numbers of EEA workers and other non-UK workers who were employed at each workplace.   (The EEA comprises all the EU countries plus Iceland, Norway, Liechtenstein and Switzerland.)
The analysis
We analyse how much the average workplace wage varies depending on the proportion of total workplace jobs filled by EEA and by non-EEA workers from outside the UK.
We take account of many other factors that influence the average wage, using standard statistical methods to adjust the figures appropriately.  Details are given in our technical note appended.
Key results
Employers drawing 10% of their employees from the EEA pay an average wage that is 0.75% less than a similar employer with  no EEA workers.  This estimate includes both the private and public sectors.
– The estimate of the wage reduction could arise by chance 1 in 16 times and so is not fully reliable.
– Taking it at face value, however, the difference amounts to about £3.90 per week for a full-time employee at the present average wage level of about £530 per week.
– There is a larger difference in the wage when an employer employs workers from outside the EEA.  Filling 10% of jobs with these non-EEA workers, the employer can expect the average wage to be 1.9% lower compared with a similar employer having no non-EEA workers.
– The estimate for the non-EEA effect on the average wage is highly reliable, as it would arise by chance less than 1 in 100 times.
The results in perspective
If it was made difficult to employ overseas EU workers, employers would look elsewhere to fill the gap.  One obvious way of doing so would be to take on people on temporary or agency contracts.
The effect of EEA employment in reducing average wages is virtually identical to the effect of employing people on temporary or agency contracts.
If the reduction in EEA employment was matched by a corresponding increase in temporary or agency contracts, the net effect on wages would be nil.
Another option for employers facing reduced opportunities to recruit from the EU/EEA would be to increase recruitment from other countries.  Our results indicate that this would lead to a larger reduction in average wages.
Where cuts in EU employment would bite
Cuts in EU or EEA employment would disproportionately affect those workplaces currently employing them in large numbers.
In 2011, only 15% of workplaces had EEA workers filling 10% or more of their jobs.
So the majority of workplaces would feel little pressure to increase wages if the recruitment of EEA workers was limited, because they already do not rely on this source.
The workplace average of EEA employment, as a proportion of total jobs, is 19% for hotels and catering, for manufacturing 8%, for business services 7% and for health 7%. These are the industries that would feel most pressure if EEA recruitment was restricted.
But hotels and catering, business services, and health already get substantial proportions of their workforce from overseas non-EEA countries, and are therefore well-placed to increase recruitment from those sources (unless restricted by government).
The contention that employment of EU workers pushes down British wages substantially is not supported.  Instead, the effect is rather small and weak – especially if compared with the effect of employing non-EEA workers.
Restricting the employment of EU workers would raise British wages only if employers could not find equally inexpensive recruitment sources. But British employers already use temporary and agency contracts to fill workforce gaps, and in some industries they already use many non-EEA overseas workers as well. These sources provide alternatives to employing EU workers and could lead to still lower average wages for British workers.
This post is based on current work for a detailed paper on the same subject, being prepared jointly by Michael White (Policy Studies Institute, University of Westminster) and Alex Bryson (University College London).
A technical note providing further details of the analysis is available here.

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