Low Pay, Productivity and Brexit

For long periods of our industrial history, Britain has been a low pay, low productivity economy. Usually, we mask the effects of these two related problems either by borrowing or by our relative strengths in the sale of financial services to the rest of the world. But since the financial crash of 2008, productivity and GDP has continually declined and Brexit is almost certainly going to make our economic malaise worse, adversely affecting living standards, the social mobility of the young and the effective operation of our public services.

Low pay reduces the surplus income of households, reducing the ability to save and to purchase goods. Coupled with “full employment” (in essence the employment of marginal labour) lowers total manufacturing costs, but does so without incentivising capital investment per worker (the key to increasing productivity). What incentive is there for small manufacturing firms to spend on capital equipment when they can hire and fire low skilled labour almost at will? Because labour costs are low, manufacturers are able to earn high profits. Low pay over an extended period also reduces tax revenue for governments. The ability of central government to finance public services is thus compromised. The ever widening gap between low paid work and high profit increases social inequality – which in turn has a social cost.

Why do we have the persistent problem of low productivity? There are several interlocking reasons. Our 19th Century-style education system has persistently failed to provide the skilled labour required by modern industry. Technical education has been neglected for years, even though the problem was recognised as far back as the 1860’s. Our industrial base is largely composed of small family-run firms, often working at the margins, with little incentive to spend capital or borrow investment money, particularly in a long period of chronic uncertainty. Our antiquated infrastructure inhibits productivity; a lorry-load of goods for export stuck on the M6 raises social costs by raising pollution and delaying transport at ports.

Brexit makes all these problems worse. Not only do we stand to see our high-tech exports to the EU decline, we also stand to lose substantial portions of our financial service industries to Paris and Berlin. The counter-argument that we can gain new markets outside the EU looks thin: Australia and New Zealand are now firmly orientated towards the expanding Asian markets. China does five times more trade with the EU than with Britain. Since the election of Donald Trump, it is America first, second and last. We should expect no favours from any “special relationship”, especially as we have never actually had one before.

It is of course true that the November budget attempts to address these problems. But the stark fact is that the Chancellor simply has no spare cash and a substantial portion of it is earmarked for our exit from the EU.

Some industries, such as pharmaceuticals, the car industry and IT firms have a history of capital investment and they pay for professional excellence. But they too fear the results of a “hard” Brexit. These next steps of British economic history will be uneven and stumbling ones. Keeping balance could be a hope more than an expectation.



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Terry Jones taught History to adult students taking Foundation courses at a College of Higher Education prior to their entry into full-time degree courses at Warwick and Coventry Universities. Since taking early retirement, he has travelled widely in Eastern Europe, pursuing a life-long interest in 19th and early 20th century European history. He has been a GCSE and "A" level tutor with OOL since 1996.

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