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EACCNY “Brexit, What’s Next?” Series | The impact of Brexit’s immigration upheaval on the UK’s workforce

With the help of our members, this thought-leadership series focuses on explaining what businesses should expect from the new reality of Brexit – in essence, with “Brexit, What’s Next?”. Today, we present Gergana Kostova-Pehlivanova, Ph.D., Senior Economist at AIG GLOBAL ECONOMICS, and based in New York; along with Vanessa Ganguin, Partner (Consultant) at GQ|LITTLER, and based in London. They will address: “The impact of Brexit’s immigration upheaval on the UK’s workforce”. |

The chaos of the COVID-19 pandemic has obscured as well as exacerbated the economic consequences of the UK leaving the European Union (EU) trading bloc. Perhaps nowhere more so than in the UK’s workforce.

The global mobility of the COVID-19 virus drastically curtailed the global mobility of people, all of which coincided with an end to decades of free movement between the UK and Europe – a key tenet of the uncompromising Brexit divorce agreement the UK government negotiated with the EU.

Last December, as the UK and many other countries grappled with lockdown measures, free flow of labor between the UK and the 31 countries of the European Economic Area and Switzerland came to an abrupt end. The consequences have not stopped making headlines in Britain.

Catastrophic headlines

Farmers warn that UK supermarkets will be forced to switch to foreign supply chains as there are not enough European staff to harvest crops. Supermarkets complain shelves have been left bare due to the pandemic and Brexit creating a perfect storm of staff shortages across various sectors from truck drivers to food factories and meat packers. Many of the EU workers these rely on to supplement the local workforce have struggled to meet the criteria set by the UK government’s new points-based immigration system.

COVID-19’s chilling effect on the workforce has dominated the UK news and obscured the long term consequences of subjecting potential European staff to the same immigration red tape as workers from the rest of the world. Around one in 75 people in the UK tested positive in the week up to July 17th, with many more self-isolating in a major headache for businesses trying to get back on their feet.

The effects of the pandemic on immigration have been brutal too. The latest UK government data available reveals 668,979 visas were granted in the year ending March 2021, a decrease of 78% year-on-year. Work visas and the family permits that go with them were down 37% to 122,512.

With the ongoing pandemic exacerbating the change in immigration rules, low migration is not surprising. Ending free movement with Europe however, looks likely to have far more long-lasting consequences to the UK’s workforce supply than the pandemic has.

Ending freedom of movement for Europeans

Estimates based on 2019 data suggest EU-born workers held 8% of all UK jobs. Those were equally split between high/medium-high skilled jobs and medium-low/low skilled jobs. As many EU nationals were employed in hospitality and other services sectors that require in-person contact, many would have lost employment during the pandemic and returned home.

Visa applications by EU nationals since the beginning of the year have been rather low. From January 1st, EU immigrants had to start applying for visas like everybody else. In the first quarter of 2021 there were actually around seven times more visa applications from Hong Kong citizens (34,300) than from the whole of the EU (5,354). This astonishing statistic is down to the December 31st 2020 cut-off for European citizens establishing residence in the UK to be eligible to apply to the EU Settlement Scheme, as well as the eligibility for around 3.4 million Hong Kong citizens to now settle in the UK in response to China’s draconian security laws in the region. Making Britain’s European neighbours jump through the same immigration hoops as migrants from other countries will have long-term consequences.

Brexit may have had limited impact on EU immigrants’ willingness to stay in the UK

Even when there was very little known about what Brexit may look like, multiple studies tried to quantify the impact of the EU leave on UK migration patterns. What they all agreed on was that net EU migration to the UK would drop significantly, slowing down population growth. Similarly, there were concerns that many EU citizens would leave the UK and new EU migrants would avoid moving in because of the new regime.

The proportion of foreign-born nationals in the UK population increased from <2% in 1901, to about 9% in 2001 and >14% in 2020. However, available data suggest that the latest estimates are very similar to those in the US and the EU. Net UK migration[1] peaked in 2015 to early 2016 and then levelled until the global pandemic started in 2020. As many had expected, net EU migration eased post the Brexit vote, while non-EU migration increased. Some have argued that EU immigration into the UK would have slowed down regardless of the Brexit vote. There were also fears that EU nationals would leave the UK due to the referendum outcome.

Soon after the vote took place, however, many EU citizens signalled their willingness to stay in the UK. Preliminary data suggest that over 5.5 million individuals[2] (approximately 8% of the UK population), including EU, other EEA and Swiss citizens and their family members, have applied to the EU Settlement Scheme (EUSS) – the route to residence created to make up for Europeans’ loss of free movement – by its final deadline of June 30th, 2020[3]. In terms of age, almost 83% of applicants were in working age (18-65) and almost 15% were under 18 years old, in line with previous research suggesting many immigrants leave the UK before retirement age. Almost 60% of all applications were made in three regions – London accounting for 35%, South East for 12% and East of England for 9%. Although the statistics do not seem particularly surprising, such detailed data on EU nationals in the UK was unavailable previously and the government, among others, had significantly underestimated the presence of EU-born nationals in the country.

Employment market bounces back strong

The greater than expected numbers of EUSS applicants have not plugged the UK’s workforce holes. People eligible for the settlement scheme were already in the UK, many of them already working or in non-economic status (like students), so not new arrivals seeking to fill new vacancies. Employment levels have generally grown since the country held a referendum on leaving the European Union in 2016, and continue to this year, despite earlier concerns about the impact on UK employment of the economic upheaval of both Brexit and the pandemic. At the same time, there has been a general fall in work-related immigration to the UK since the June 2016 Brexit referendum, largely due to the fall in EU nationals migrating to look for work.

As the UK emerges from pandemic measures, employment confidence is much stronger than anticipated. According to the Chartered Institute of Personnel Development (CIPD), overall demand for labor has strengthened considerably between this year’s winter and spring quarters due to both a fall in expected redundancies and an increase in recruitment activity.

Sectors that relied on European staff enjoying free movement to fill jobs are suffering the consequences of workforce shortages, just as demand is increasing again. Employers have reported having to increase salaries to offset recruitment difficulties, as well as investing in training and seeking to recruit from a wider range of under-represented groups. Yet workforce planning and training has not been sufficient.

Sponsoring staff is not always the answer

Employers that rely on Europeans now require a sponsor license to sponsor new staff from the continent. Yet only a small fraction of UK employers have so far secured a license. Some do not have margins that would allow the costs and duties of sponsoring staff. Others have vacancies not on the government’s lists of workers eligible to be sponsored. For example, some care sector jobs are still not listed, despite an estimated 112,000 vacancies in adult social care in England last year.

The haulage industry is also lobbying for drivers to be added to the so-called Shortage Occupations list, allowing them to qualify for a Skilled Worker visa. The Road Haulage Association warns vacancies due to Brexit and the pandemic mean food supplies are “close to a crisis point”.

For many unskilled and semi-skilled workers, such shortages seem likely to continue unless more routes are opened. Yet there are no easy answers. The Seasonal Workers Pilot scheme allowing farm workers to spend six months in the UK has not worked well enough to prevent crops rotting on fields without the staff to pick them. The scheme was extended from 10,000 to 30,000 people this year after lobbying from farmers’ unions, but a rethink is urgently needed to protect the UK farming sector which wants a more permanent, wider solution to the end of free movement.

What new UK immigration routes should employers be aware of?

Unsponsored routes are among new immigration reforms, but mainly at the other end of the employment market. Prime Minister Boris Johnson insists Britain’s “new post-Brexit points-based immigration system” makes it easier for firms to employ the “brightest and best from around the world.” Though the UK already had a points-based immigration system for work-related visas from places not enjoying free movement, a raft of measures, some already in place, others recently announced, do facilitate immigration for highly skilled workers as well as entrepreneurs and innovators.

The Skilled Worker route rebranded the most popular work visa route in January, removing the Resident Labour Market Test, reducing the salary and skill thresholds and suspending the annual cap on sponsored worker migration. The list of shortage occupations with lower thresholds expanded too. The UK government promises to make the whole sponsoring process easier.

In addition, the recent immigration policy changes allowing many Hong Kong nationals to hold jobs of any skill level in the UK may help bridge some labor supply gaps.

Good news for highly skilled workers, graduates and entrepreneurs

The Graduate Visa launched in July was great news for employers seeking to hire international students in the UK graduating this summer without the bureaucracy of having to first sponsor them. Graduates can work or look for work for up to two years after studies (three years for doctoral graduates) after which they can join the Skilled Worker route. This is also good news for UK’s higher education institutions seeking to attract more international students in a pandemic.

No job offer is needed for the new Global Talent Visa for those excelling in academia, research, the arts or digital technology. Requirements have been eased for recipients of prestigious prizes and coronavirus researchers.

Fast-track visas for recognised scale-ups have been announced for next year. A High Potential Individual route has also been promised by the Department for Business, which also announced relaxation of some of the more onerous requirements for Innovator visas, as well as a Global Mobility Visa.

These immigration reforms are aimed at certain high-growth hubs that the government has chosen to prioritise, such as the fintech sector, where around 42% of its 76,500 workers are migrants. They are little comfort to sectors such as farms, factories, hospitality, building or transportation, which have relied on readily-available, free-moving Europeans to fill their workforces.

Workforce shortages are a drag to UK growth

Immigration policies are instrumental in shaping the UK labor market, especially after the economic changes of Brexit and the coronavirus pandemic. From an economic perspective, immigration is important for growth. On the one hand, too much immigration can lead to high unemployment rates and competition between British citizens and immigrants for some jobs. In turn, this can result in lower wages and lower productivity, hurting the economy. Too little immigration, on the other hand, can also damage growth. Employers unable to find job seekers with the appropriate skillset start competing for workers by increasing wages. This leads to higher inflation, but overall economic growth remains below potential.

The latter scenario has recently played out in many countries as a result of supply-demand disbalances due to the ongoing pandemic. The UK has been particularly impacted by labor shortages also because of the new immigration rules for EU citizens. In fact, recent market surveys have indicated Brexit as a key factor in reducing the supply of workers, especially temporary staff. London is most severely affected by labor supply shortages with recruiters pointing out the shortage of overseas workers.

Many studies have concluded immigration is beneficial for the UK overall. However, it must be the ‘right’ type of immigration. Immigrants who complement the skills and talents of the existing labor force can help create jobs without taking the jobs of British workers. Low skilled workers can also help increase the levels of production in labor-intensive sectors and expand the economy without necessarily hurting domestic workers. In addition, immigrants create additional demand, which expands the economy. Research also suggests that migrants in the UK are a fiscal asset[4]. They are also less likely to claim unemployment benefits than UK nationals.

Labor supply shortages are a major drag to economic growth in the UK. The government has a very difficult task to find a balanced solution to labor shortages in all sectors and skill levels in the future. Many current workforce shortfalls were predictable and will require solutions that stick.

AUTHORS:

  • Gergana Kostova-Pehlivanova, Ph.D., Senior Economist, AIG GLOBAL ECONOMICS
  • Vanessa Ganguin, Partner (Consultant), GQ|LITTLER

Compliments of both AIG & Littler Mendelson – members of the EACCNY.

[1] Net migration accounts for both inflows and outflows of immigrants.
[2] About ~0.5m repeat applications were excluded from the count.
[3] Almost 20% of all EUSS applications came from Polish nationals, 19% from Romanians, 10% from Italians, 7.5% from Portuguese, 6.4% from Spaniards, 5.8% from Bulgarians, and the remaining 37% from all other nationalities.
[4] First, many migrants arrive after they have completed their studies, so they do not incur the education costs associated with natives. Second, many migrants tend to leave the UK before they reach retirement age, so the costs associated with their retirement are also reduced.