Brexit: a blow to the low-paid?

The CBI reported today that manufacturers’ business confidence has fallen at its fastest rate since early 2009, causing falls in investment and hiring plans. This corroborates surveys by Deloitte, Markit (pdf), the Institute of Directors and, to a lesser extent the Bank of England* all of which suggest that the Brexit vote will depress economic activity. This shouldn’t be surprising: uncertainty is bad for the economy.

What worries me is that the pain of this will disproportionately hit the low-paid. A new paper (pdf) from the Minneapolis Fed says:

It is precisely the households at the bottom of the wealth distribution with low savings rates and high propensities to consume out of current income that suffer the largest welfare losses from a severe recession. Further, these losses are much more severe than those sustained by the "average" household.

This is because the low-paid have no financial assets to cushion themselves against job loss and so must suffer either big falls in living standards or resort to high-cost payday lenders whereas the rich have savings and/or access to cheaper credit**. Also, firms faced with uncertainty might well respond by hoarding skilled labour – which is harder to find when needed – and trimming unskilled workers.

Although the coming downturn will probably not be as severe as the 2009 one, I suspect that these mechanisms will still operate.

What’s more, conventional macroeconomic policy can do little about this. Although Philip Hammond says he’ll “reset fiscal policy” he won’t do so until the Autumn Statement, by which time the downturn will be well under way. Nor can monetary policy provide much support: Bank economists have estimated that a quarter-point cut in Bank rate adds less than 0.2% to output. There’s a reason why Mark Carney has said:

There are limits to what the Bank of England can do. In particular, monetary policy cannot immediately or fully offset the economic implications of a large, negative shock.

And from the point of view of inequality, QE would only make things worse. Insofar as this supports the economy, it does so by raising asset prices. And the beneficiaries (pdf) of this, unsurprisingly, are those who own assets – the rich.

For these reasons, economic forecasters have cut their predictions for GDP growth next year, from 2.1% to 0.8%, despite expecting a policy loosening.

So, why might this not hit poorer workers harder? One possibility is that uncertainty might see an increase in the labour-capital ratio as firms postpone expensive capex projects and use cheap labour instead. Also, because there’s a lot of churn at the bottom end of the labour market, some of the redundant low-paid workers might step quickly into new jobs.

What’s more, for now we are only seeing the short-run effect of increased uncertainty. In the long-run, it’s possible that by depressing world trade growth, the losers from Brexit will be those in more skilled manufacturing and finance jobs.

For now, though, it might be the low-paid that suffer the most from Brexit. These, though, were more likely (pdf) to have voted Leave. We might ask them Johnny Rotten’s famous question: ““Ever get the feeling you’ve been cheated?”

* The Bank’s survey found that most firms didn’t think Brexit would affect their capex or hiring plans. I take no comfort from this. As Geroski and Gregg showed in their great book, Coping with Recession, recessions happen because a few firms suffer badly, not because all suffer mildly. In the 1991 downturn, 10% of firms accounted for 80% of the gross drop in sales.

** Yes, I know the overlap between the low-paid and low incomes isn't perfect. But the point still holds, mostly.

Comments

[Bob]

True, but that applies to any government policy that harms 'corporate confidence.' The point is the corporates are not in charge, or should not be.

[It's social and cultural change, stupid!]

Poor deluded Chris, still thinking economics was the primary motivator in the Leave vote.

Clearly the people would rather live in a culturally civilised country and be poorer than be surrounded by illiterate head-chopping Middle Eastern goatherds and a little richer. Money won't buy you a new head...

[aragon]

Economics of Brexit

George Osborne was running the economy into recession with austerity and balancing the books, any policy adjustment is a economic win.

With the corporate culture of stretch and extract, like Philip Green at BHS, aka good old asset stripping, which also applies equally to big pharma, who extract economic rents from patents.

You could not make this up!

https://www.theguardian.com/uk-news/2016/jul/25/hmrc-cleaners-merseyside-strike-pay-national-living-wage

Government sells office buildings to off-shore company and rents them back, and uses services of another subsidiary which manages the building and sub-contracts to a third company who employs the cleaners.

The third company reduced the cleaners hours to compensate for the rise in the minimum wage. But presumably don't reduce the work load.

This is the corporate culture, where profits have doubled, and the dividend increased by half.

I welcome the policy of getting rid of the patent box, no doubt exploited by big pharma.

The outsourcing of Government assets and services to companies like these needs to be reversed. This applies to Public Private Partnerships and Public Finance Initiatives. (PPP/PFI) wherever possible. And no new ones entered into.

[joe]

It is not just the poor who have no financial reserves it extends right through to those below board level. Personal debt as well as Government debt is a huge UK burden.

Devaluation of the £ will not help exporters as unlike the ERM fiasco the world trade growth is spluttering towards zero. UK does not export mass market goods but luxury and one off items which are not price sensitive. We also import components in supply chains that will cost more. Foreign competition is so intense that any UK export advantage is nullified by lowering of competitor profit margins. Import costs will soar as we have to import as we are no longer self sufficient in even basic commodities. Low paid workers will be laid off this time as the national "living" wage now rises each year and there are training levies to pay.

There actually is no business uncertainty. We know the £ will be at least 12% down for some time. The UK Government wants to go onto 2020 and have confirmed Brexit negotiations will start in 2017. We know that new trade agreements cannot be finalised until after leaving the EU. We know that free movement and high migration levels will stay. We know the £53B inward investment as an EU base will dry up. We know that UK universities and joint EU research will not include us. We know that interest rate falls and QE will not help any businesses. We know that house builders are rapidly cutting development plans.

[BCFG]

If people voted to leave the EU because they think it makes them better of economically then they are not only cheated but stupid.

If they voted leave thinking this would make them safer then they are not only stupid but bigoted. Violent crime has actually been decreasing as immigration has increased. In fact if we produce a graph and have on the x axis the whiteness of the nation and the y graph we have recorded crime we would see quite clearly that the more white the nation the higher the crime, especially violent crime!

The belief that 'immigrants' have brought crime is a thoroughly racist view and one not supported by the facts. But since when have facts got in the way of racists!

The truth of the matter is quite the opposite presented by fascists like "It's social and cultural change, stupid!". The fact is people are fleeing nations that have been destroyed by the white man, for the white mans material gain. The Iraq war, that disaster supported and cheered by Blairites everywhere not only killed hundreds of thousands but displaced millions, including over 1 and half million into Syria. This Blairite nation destroying policy has created the biggest mass exodus since Moses.

It has all gone rather quiet since the Chilcott report, when are those purveyors of death and destruction, i.e. the Blairite war mongerers going to get their just punishment?

[celebrate diversity (whatever that means) or you're a WAAAAAYCIST!]

"The belief that 'immigrants' have brought crime is a thoroughly racist view and one not supported by the facts. But since when have facts got in the way of racists!"

*cough* Rotherham *cough*

[celebrate diversity (whatever that means) or you're a WAAAAAYCIST!]

"The belief that 'immigrants' have brought crime is a thoroughly racist view and one not supported by the facts. But since when have facts got in the way of racists!"

*cough* Cologne *cough*

[Alistair]

And you didn't even mention one obvious effect hitting poor workers: a lower minimum wage. Osborne's so called living wage is a proportion of median earnings. If these are lower so will it be.

[George Carty]

"It's social and cultural change, stupid!" is clearly an Islamophobe rather than a racist.

But BCFG is wrong about the invasion of Iraq -- while it certainly didn't help things, it wasn't for the West's material gain (although well-connected firms such as Halliburton did profit handsomely, it was largely at the expense of the American taxpayer rather than the Iraqis).

And the Syrian Civil War (which provoked the flood of refugees into Europe) is at its root a war over water, caused by a combination of climate change, the inept policies of the Assad regime, Turkey's Southeastern Anatolia dam project, and also the rapid increase in global food prices following the 2008 Crash, as speculators piled into commodity futures.

Another thing, given that Vladimir Putin wants to break up the EU (and has been bankrolling Europe's far-right parties for this purpose) and given that Assad is dependent on Russian military support, how likely is it that those gang-rapes in Cologne were perpetrated by shabiha (Syrian regime thugs) who travelled to Europe posing as refugees, under instructions ultimately coming from the Russian dictator?

[havnaer]

Waitaminnit...Is somebody succumbing to political propaganda, here? The CBI report concludes with predictions. Among them:

Key findings – next quarter:

•A balance of +10% expect export orders to rise (21% expect an increase, and 11% a fall)
•19% of businesses anticipate a rise in output volumes, and 12% a fall, giving a rounded balance of +6%

Hmmm...a INCREASE in export orders and production volume is supposed to lead to a DECREASE in jobs? How does that happen?

And speaking of cause and effect, how is any of this related to Brexit? What mechanism is at work? Couldn't a decrease in employer confidence be related to the less than popular (some would say crazy) Presidential candidates in Britain's largest national Export market across the Pond?

IMHO, its lazy to simply point to a convenient scapegoat and claim "why", rather than think things through and explain "how".

[Staberinde]

If the poor were more likely to vote Leave and are more likely to suffer from Brexit, I guess they'll be getting not only what experts said they would, but also what they deserve. Screw 'em.