The unexpected result of the Brexit referendum, working through the rapid depreciation of sterling, has hurt British workers. Rui Costa, Swati Dhingra and Stephen Machin (LSE) show that the big drop in the value of the pound caused a rise in import prices, which has led to a fall in both wages and training for workers employed in the most heavily hit sectors.
In the modern world of global value chains, increases in the price of imports exert a negative impact on workers because businesses are increasingly relying on inputs from abroad. The sterling depreciation following the Brexit vote raised the costs of industries that rely on imported inputs from countries whose currencies became much stronger against the pound on referendum night. Increased export
earnings did not provide a reprieve from import cost pressures. Workers in the most heavily hit sectors suffered slower wage growth and cutbacks in job-related education and training.
Our research finds that after the unexpected referendum result, the pound sterling (GBP) suffered its biggest one-day loss since the 1970s. It depreciated most against the Japanese yen, US dollar, and Saudi riyal. The euro ranked
19th on the list of currencies. Because the sterling depreciated to varying degrees against various currencies, industries trading in different world markets faced different cost and revenue shocks.
The depreciation increased the price of imported intermediates (goods and services used in the production of other goods and services) by more in industries experiencing a larger sterling depreciation due to the Brexit referendum result. Businesses absorbed some of the increased costs of imports by lowering worker wages and investment in training. Workers in industries that saw bigger increases in the price of intermediate imports experienced slower wage growth and reductions in job-related education and training. The hardest-hit sectors were finance, insurance and real estate, professional and scientific services, and information and communication, which get a relatively higher share of intermediate imports from countries like Japan and the United States.
While intermediate import prices rose differentially due to the fall of the pound, export prices did not. This reflects disproportionate cost increases as intermediate imports became more expensive rather than revenue gains from exports.
These findings are highly significant for the future of work in post-Brexit Britain. UK workers are facing reduced real wages. Compounding this, their future earning potential is falling due to cutbacks in on-the-job training. This provides new direct evidence that, in the modern world of global value chains, changes in the cost of intermediate imports act as an important driver of the impact of globalisation on worker welfare. Over and above the Brexit din, and the key related issues about the future of trade, the episode studied therefore adds to widely expressed, growing concerns about poor productivity performance relating to skills and to patterns of real wage stagnation that are plaguing contemporary labour markets in many countries.
Falling real wages are back and training cuts are deskilling the UK workforce in the wake of the EU referendum. This does not augur well for workers’ living standards and for future productivity. These patterns of worker deskilling make it even more pressing that policies (such as boosting skills or tax credits for human capital) are aimed at the twin prongs of weak wage growth and sluggish
This post is an edited version of the executive summary of the CEP Discussion Paper 1622, Trade and Worker Deskilling: How the post-Brexit pound has hurt Britain’s workers. It represents the views of the authors and not those of LSE.
Rui Costa is a research economist at the Centre for Economic Performance, LSE.
Swati Dhingra is a Lecturer in Economics and trade research programme associate at the Centre for Economic Performance, LSE.
Stephen Machin is a Professor of Economics and and Director of the Centre for Economic Performance, LSE.