Free movement of labour - How it impacts Britain's economy

With preliminary talks regarding Britain’s plan to exit the EU well underway, Theresa May has her work cut out in terms of navigating the future of Britain’s membership within the single market. A key area of discussion has been the restriction of free movement of labour into the UK. We take a closer look at how free movement of labour into the UK has had an impact on the economy, and what could potentially happen in the future should Britain implement restrictions on immigration. 

What free movement means for the economy

There are four components which make up free movement, and those are capital, goods, services and labour. In an interview EUROPP editor, Stuart Brown, Jonathan Portes, Principal Research Fellow of the National Institute of Economic and Social Research, discussed the intents and purposes of free movement, saying, “The idea was to establish a liberal market economy where people could trade with each other across borders and the free movement of labour is part of that.”

While no one can deny that the UK has benefited from having access to the single market, there has been some contention about Britain accomodating free movement of labour. There has been a great deal of negative commentary from Euro-skeptic MPs and members of the public who believe that immigration results in fewer jobs for British people and a lower average wage.  “In the case of unemployment there is a lot of evidence to suggest that this isn’t the case,” says Jonathan. On the contrary, he continues, “Immigrants who move into a particular area increase the supply of labour, but they also increase the demand for labour because they produce things, they buy things and they thereby create demand in the local economy.”

The pros and cons of free movement

No matter how mutually beneficial a relationship is, there will always be downsides to consider, and free movement of labour is no exception. Below, we address some of the negatives, followed by the positives:

Cons:

It could leave a dent on infrastructure: Over the course of last year, the UK's population has grown by half a million. While an increased working population could inevitably increase the value of GDP and lead to more tax revenue which could then be used to improve public services, the rapid increase in the UK population came at a time where there was restrained public spending, resulting in increased pressure on public service institutions such as the NHS.

Increase housing crisis demand: When considering the slow rise in the housing market, it’s hard not to wonder how it will be able to meet the demands of the rising population. An excerpt from an article published by EconomicsHelp.org, reads, “The large net flows of migrants have not caused this housing crisis, but the additional flows of people has exacerbated the gap between supply and demand. In theory, more houses could be built to deal with rising demand and population growth. But, this is complicated by the fact that the UK has limited land to willingly allocate for building, e.g. protests against building new houses on greenbelt land.”

Decline in quality of life: Because the UK has limited land in which to willingly build houses and roads to meet the demand of the increasing population, the nation runs the risk of becoming overcrowded. This could lead to elevated levels of economic expenditure, thus diminishing the quality of life in Britain.

 

Pros:

Fills the gap in labour shortages: Many countries experience labour shortages, either through certain skilled positions or jobs that are deemed undesirable by the native population. Net migration of specialist or undesirable job workers into the UK has assisted in decreasing labour shortages. “Free movement has, among other things, afforded the UK the ability to employ individuals who fill the gap of a specific skill demand within a specialised industry, thus minimising the shortage of skills, and allowing employers to hire the best individuals who will empower their business and increase revenue,” says Richard Hubbard, former Search candidate and Interim Finance Project Manager at The Original Factory Shop.

Minimises unemployment: While many harbour the misconception that more migrants mean less jobs for UK citizens, the reality is that more people actually increase employment because migrants can work on a temporary basis within the UK when the economy is thriving, then return home during a slump period. “Free movement has been shown to lower unemployment within the UK, as it also affords UK citizens the opportunity to work abroad, thus expanding their career experience and affording them the opportunity to cultivate and develop specialised skills to meet labour shortage demands should they return to the UK,” says Richard.

Increased tax revenue: According to OBR’s Fiscal Sustainability Report, researchers found that although the increased influx of migrants increased demand on public services, migrants were less likely to claim government benefits. What’s more is that the vast majority of migrants enter the country as adults with the intent to work, meaning that they contribute more towards the economy than they take out. An excerpt from the report reads, “Given this pattern, it seems probable that immigrants will make a more positive contribution to the UK public finances over their lifetimes than natives. They are relatively more likely to arrive as adults, so the UK will receive the positive contribution from their work without having to pay for their education, although their children will require support. It is also the case that upon arrival, if unemployed, they are not immediately entitled to – or are not eligible for – unemployment benefits, and they will contribute to tax receipts as soon as they start working.”

Prevent wage inflation: Ever noticed how the rare treasures of this world are often the ones with the highest cost? This is because the availability does not meet the demand, therefore buyers must be narrowed down through retailing precious commodities at a high price. Although not quite economic inflation, this same principle applies to the relationship between labour and the economy. “If an economy experiences labour shortages, it will put strong upward pressure on wages; higher wages can easily lead to inflationary pressures. Free movement of labour means rising wages will attract more labour into a country and this will prevent excess wage inflation,” reads a passage from EconomicsHelp.org.

Looking ahead - what could happen should Britain restrict free movement

We are still in a period of uncertainty regarding the future of free movement between the UK and EU. While EU leaders have stated that the UK will need to abide by all the stipulations of the single trade agreement, including adhering the free movement of labour, should they wish to remain within the single trade, certain economic experts argue that Britain’s economy would thrive if they exited the single trade altogether. In an interview with the BBC, Sir James Dyson, the billionaire entrepreneur who founded the Dyson Company, said he believed that Britain’s economy would be liberated if they left the single trade, asserting that it would be unwise for the EU to impose tariffs on British goods because it imports £100 billion more in value than it exports. However, he did express his hopes that leaving the single market would not put a stop to free movement altogether, even though it would open up the possibility to hire special skills workers from countries outside of Europe.

Others are concerned about how restriction of free movement could cause a negative ripple effect in labour that could spill over into other aspects of the British economy.  “It’s difficult to say with full certainty what will happen should Britain restrict free movement, although it is likely that certain companies may look into broadening their horizons on an international level due to a specialised skill shortages within the UK,” says Richard.

Whatever the future may hold for free movement of labour throughout the UK, it’s important that organisations maintain investment flexibility and stay ahead of the game  by exploring opportunities outside the EU to meet skill shortage demands, even going so far as to research the legislation regarding foreign, special skills workers within the UK.

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