The government’s new immigration plan, which aims to move away from relying on influxes of cheap labour by closing Britain’s borders to “non-skilled” workers, is based on a flawed understanding of how the economy works. It reveals the risks of privileging ideology over economics, the hallmark of Conservative governments since the 1970s.
The government argues that by deliberately creating shortages of workers, wages will rise as firms compete for scarce labour. In turn, this will provide an incentive for firms to upskill their workers and to substitute more labour for capital, thus raising productivity.
As was argued by the IPPR commission on economic justice – based on the experience of Scandinavian economies – if wages rise, productivity will follow. This is in stark contrast to traditional economic orthodoxy that productivity has to rise so that wages will follow. Higher wages would be good for workers and their families and for the economy as a whole. But the Tories plan is wrongheaded. Here’s why.
The idea underpinning the government’s plan is that wages have been held down – they have only just barely returned to their pre-crisis March 2008 peak – because there are too many workers chasing too few jobs as a result of EU freedom of movement. But this completely ignores the realities of the modern labour market. The problem is not the intensity of competition between workers for jobs, but the excessive power of employers and the weak position of workers in Britain.
In many places today, a few large firms dominate the local labour market. Large employers such as supermarkets, distribution centres and hospitality businesses are able to get away with paying the minimum wage, since there are few alternatives for workers. Changing the immigration rules will not shift this power imbalance as workers will still have little choice but to accept the pay offered by excessively powerful businesses.
Moreover, after constant attacks on trade unions by successive Conservative governments, collective bargaining no longer has the power to effectively confront employers. This is further exacerbated by the deliberate erosion of employment rights, with greater numbers of workers on precarious zero-hours contracts and poor enforcement of what little rights exist. Again, immigration rules do nothing to solve these problems.
The government also argues that firms will reach out to “economically inactive” Britons and pull them into new jobs, thereby increasing overall economic output. This ignores that Britain is at near-full employment. After 10 years of austerity and a cruel and callous benefits system, Priti Patel’s claim that there are around eight million workers that could enter the labour market is at best wishful thinking and at worst downright mendacious.
But there is a deeper problem, too. Forty years of free market orthodoxy has seen Britain deindustrialise at a faster rate and to a greater degree than any other advanced economy. Britain stands alone in the G7 group of industrialised economies as the only country where manufacturing is less than 10% of the economy. The service sector employs too little machinery or technology to achieve the levels of productivity found in modern manufacturing. Reversing this situation requires a well-financed industrial strategy to revive Britain’s manufacturing sector, not an ill-thought through, ideologically driven set of changes to Britain’s borders.
But perhaps most strange of all is the absence of any discussion about demographic change: Britain is a rapidly ageing society, with ever-increasing demands for health and social care and greater pension liabilities. The dependency ratio – the number of workers to economically inactive people, mainly the elderly and children – is deteriorating. Britain needs immigrants not only to work in vital sectors such as social care, but to make the government’s finances sustainable.
The Tories are responding to cultural anxiety about immigration with a promise of better pay for Britain’s workers. It’s a policy doomed to fail, based on ideology not insight. Britain is still suffering the consequences of the destructive economic decisions of the 1980s. How long will this mistake reverberate through the British economy? Only time will tell.
• Tom Kibasi is a writer and researcher on politics and economics