The UK’s skills squeeze poses another Brexit dilemma

There was a particular irony in the recent profit warning from the JD Wetherspoon pub chain, which said it was having to increase wages in the face of a tight labour market. Tim Martin, the Wetherspoons chairman, was a prominent supporter of Britain’s exit from the EU — which is set to make the labour market even tighter.

Mr Martin suggested Wetherspoons would not be further squeezed by Brexit as many of its pubs were in low-immigration towns or rural areas and 90 per cent of its workers were British-born. But across the economy, competition will only intensify as the government prepares to curb immigration in response to what it sees as one of the driving forces behind the Leave victory in the 2016 referendum.

The UK is already at its closest to full employment since the early 1970s, with a 4 per cent jobless rate. Companies such as Royal Mail and Ryanair have also warned of wage pressures. A Financial Times report, meanwhile, found the hospitality, IT, construction, healthcare and leisure-related services sectors were suffering acute shortages of skilled or unskilled workers.

In some ways, rising wages are welcome, after pay increases lagged even the insipid recovery of recent years. Real incomes have still to regain their level before the financial crisis of a decade ago. But the tight labour market has important implications.

The IT, healthcare and construction sectors are all confronting a shortage of necessary skills. For hospitality and industries such as hairdressers and beauticians, where half of staff tend to be under 30, the challenge is different. Thanks to a dip in the birth rate around the millennium, one senior hospitality sector representative says the issue is simply a “shortage of bodies available”. The meat processing industry, with 60 per cent of its staff coming from continental Europe, has raised alarms too.

By unleashing some pent-up corporate investment, a benign Brexit under an agreed deal — though that scenario seems ever more in question — might increase UK economic output by 1 per cent above current forecasts over, say, three years. But with such meagre growth in productivity over the past decade, higher wages are likely to be passed on quickly to consumers, resulting in inflationary pressures. Interest rate rises from the Bank of England would then be likely to snuff out much of this growth. A tighter jobs market makes growth even more likely to be inflationary.

The government needs, therefore, to strike a careful balance between the urge to staunch immigration, and businesses’ need for staff. Its Migration Advisory Committee recommended scrapping a 20,700-a-year cap on “Tier 2” visas for high-skilled workers, to ensure companies can attract talent. But it suggested limiting low-skilled migration, except in agriculture.

The Home Office, due to publish an immigration white paper in coming weeks, has indicated it might reject some MAC recommendations. It should consider sector-specific visa schemes allowing critical industries such as food processing to bring in non-UK workers for a defined period.

Over the longer term, the answer must be, in part, investment in education and re-training to match the needs of British employers. Even if it can navigate its way successfully through Brexit, however, the government will face a continuing dilemma. The 2016 vote put it under pressure to close doors to migrants. Yet even a modest Brexit dividend — one that recouped some of the growth lost since the referendum — could be partially dissipated if there are not enough workers to deliver it.