Thinking about the UK’s labour market and political risk, the more pressing issue is the uncertainty is immigration policy. Something of a political football during both 2015’s general election campaign and this year’s EU referendum, immigration has become a red line for government. In seeking to boost her Brexit credentials and win political ground from Labour and UKIP (despite having failed to reduce net migration during her six-year stint as Home Secretary) Theresa May has put this issue firmly at the top of her agenda as Prime Minister.
Freedom of movement is now the defining point in discussions on Brexit negotiations. Having ruled out Boris Johnson’s plans for an Australian-style points-based system, the Prime Minister clearly felt the need to demonstrate that she has not gone “soft” on immigration and is now hinting at a tough work permit mechanism. This would preclude EU migrants coming to the UK without having already secured a job, which has ruffled feathers in industries that rely on a flexible and easily available workforce, notably hospitality and construction.
While Brexit poses obvious risks, businesses and investors should also be looking at the approach of the UK government from those coming from further afield – it’s worth bearing in mind that around 36 per cent of the UK’s migrant workforce is made up of non-EU workers. Not only has May consistently pledged to end freedom of movement within the EU, it looks like she has every intention of extending this hard-line approach to the rest of the world. On her first trade mission to India earlier this week, the Prime Minister dismissed suggestions of an accelerated visa process for wealthy Indian businesspeople, refused to reconsider the inclusion of students in the net migration target and rejected demands to change the visa eligibility criteria unless the Indian government agreed to “step up the speed and volume of returns of Indians with no right to remain in the UK”.
In doing so, she has resisted considerable pressure from British and Indian businesses alike. The Chief Executives of Heathrow Airport and Virgin Atlantic recently wrote to the Prime Minister about the importance of a more flexible visa system to the UK’s tourism economy, noting that over 400,000 Indian tourists visited the UK last year, spending £433 million. This seems to have been to no avail. May refused to replicate a pilot scheme set up under Cameron and Osborne that slashed the price of tourist visas for the Chinese.
May’s inflexibility on immigration generates considerable political risk for investors across all sectors – from health and education, to technology and hospitality. Most obviously, a clamp down on immigration would restrict labour supply and drive up wages. This is a particular concern for sectors relying heavily on EU staff: they have enjoyed the benefits of a steady supply of these workers and now have the most to lose. A large proportion of the UK’s dentistry workforce, for example, is made up of Spanish and Portuguese dentists. At present, investors in the sector benefit from an oversupply of dentists, which has held down wage inflation in recent years, but this looks set to change in future. Businesses across all sectors are likely to face a shrinking supply of labour but potentially rising payroll costs, as a result of other policy measures such as the National Living Wage.
And immigration is more than just a numbers game. There are real concerns over the potential loss of skills resulting from a closed-door immigration policy. Highlighting the “digital skills crisis, from schools to the workplace”, the former Business, Innovation and Skills Committee’s July 2016 report on the Digital Economy emphasised that the UK’s digital sector relies heavily on skilled workers from the EU, and called on government to address these workers’ rights to remain in the UK “at the earliest opportunity”.
The government is, of course, alive to these concerns. While May has so far been unwavering in her approach to immigration, not wishing to give anything away in the run-up to Brexit negotiations, some form of compromise will almost certainly be necessary in future. Although there is much political rhetoric around upskilling the domestic workforce, with policies such as the Apprenticeships Levy making headlines, British workers alone will not, in the near-term at least, be able to provide the skills needed to grow the economy or deliver basic public services. Historically, the government has been very reluctant to include new categories on the Shortage Occupation List, which accelerates access to the UK for non-EU workers with skills that are in short supply in the domestic labour market, but it may have to be more flexible – or more realistic – if it chooses to shut the door on European workers. To give an example, at present only maths and science secondary education teachers are included on the list, but this may well be extended in future. Indeed, Chancellor Philip Hammond has already indicated that ‘highly skilled’ workers may be exempt from restrictions on freedom of movement.
There are powerful forces in favour of a more flexible immigration policy, not least the leaders of other EU member states. German Chancellor Angela Merkel, supported by her counterparts across Europe, has been clear that freedom of movement is a non-negotiable price for the UK’s access to the Single Market. She may yet prove to be the immovable object that defeats the irresistible force of Theresa May and her Brexiteers.