June 24, 2016

IZA WoL OPINION: "Under the best of circumstances Brexit will create a smaller UK economy"

“Under the best of circumstances Brexit will create a smaller UK economy”       

IZA World of Labor opinion piece by Professor Daniel S. Hamermesh                              

The United Kingdom has decided to leave the European Union, IZA World of Labor Editor-in-Chief, renowned economist Daniel Hamermesh is not too optimistic regarding the prospects.

“The implications of the UK’s decision to leave the EU are unclear, and will depend on what happens politically once the dust has settled. The transition to a new relationship between the UK and its former partners will generate economic uncertainty, which is the best reason to hope that the exit proceeds quickly.

The most optimistic outcome is that Britain reverts to membership of the European Free Trade Association (EFTA), which it helped found in 1960, or some similar successor organization. One might imagine that, after some turmoil, trade in goods between the UK and its former EU partners will still be tariff-free, as it is now.

What will change is the treatment of EU member countries’ citizens who seek work in the UK. They will be treated the same way as non-EU citizens currently are, requiring an expensive and lengthy application process. This will reduce the flow of labor from EU countries into the UK, especially that of low-skilled workers who cannot afford the fees (currently nearly £1,000 for a visa that allows three years of work, the kind I purchased). It will raise labor costs, especially in industries that use a lot of non-UK labor; for example, construction and services—there will be many fewer European baristas at your local Costa or Starbucks. Construction and service costs will rise, and real incomes in the UK will fall somewhat.

Currently, EU students pay the same fees as UK students to attend university in the UK. That will change: they are likely to be charged the much higher fees that are now paid by, for example, Chinese students. Some EU students will be willing to pay these fees, but many will not, so UK universities—especially lower-quality ones—will see reduced enrolment. Since many EU citizens studying in the UK remain there for work, reduced UK university enrolment will reduce the country’s supply of educated workers. 

Taken together, under the best of circumstances Brexit will create a smaller UK economy, one with a labor market that is less integrated with its neighbors’ and less able to take advantage of differences in skills between it and the rest of Europe that can make both sides better off. Of course, even this scenario may be too optimistic, as it assumes that the UK political union will remain intact.”

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Notes for editors: Professor Daniel S. Hamermesh is Professor of Economics at Royal Holloway University, London and Editor-in-Chief of IZA World of Labor (http://wol.iza.org). IZA World of Labor is a global, freely available online resource that provides policy makers, academics, journalists, and researchers, with clear, concise and evidence-based knowledge on labor economics issues worldwide.