A guest blog by Agnes Norris Keiller from the Institute for Fiscal Studies.
With less than a year until the UK leaves the EU, what Brexit will mean for a wide range of policy areas remains shrouded in uncertainty. Following the WBG’s own report on what the various ‘flavours’ of Brexit might mean for women and other groups, this post discusses firstly why we might expect economic dislocations due to Brexit to affect women and men in different ways, and secondly how policymakers can respond to try to mitigate these impacts.
First, it is important to acknowledge that Brexit is unlikely to pass by without negative consequences in at least some sectors of the economy. If tariffs start being levied on UK exports to the EU for instance, then those industries that currently export to the EU will likely see a reduction in demand for their goods and services as they become more expensive in the EU market. In addition to this, many firms are also likely to see a rise in costs as 56% of goods imported from the EU are used by other UK firms in their production processes. Non-tariff and other trade barriers are also likely to have an effect. The combination of reduced demand and increased costs is likely to put pressure on certain sectors of the economy and result in them becoming smaller.
How might we expect these impacts to affect workers in negatively affected sectors and how might they affect women in particular? If firms responded by cutting production in the UK, it is likely that some individuals in the UK would lose their jobs or would have their hours of work cut. Another possibility is that hourly wages suffer. These tend to have very different distributional implications: job loss means a big negative shock concentrated on a relatively small number; lower wages typically means a less severe, and probably more gradual, shock affecting more people. In addition, when thinking about living standards, there are many households who are effectively insured much more by the state against falls in earnings than used to be the case. Whereas in times gone by the welfare safety net was focused largely on the unemployed, the introduction and expansion of in-work benefits and tax credits mean the current system provides a considerable boost to the incomes of low-earning working households (albeit with levels of generosity that are currently being cut back).
The distinction between job loss and poor earnings growth is an important way in which negative economic impacts of Brexit may affect men and women differently. First, women are more likely to be paid the minimum wage than men: in 2017 around 8% of female employees were paid at the minimum compared to around 5% of male employees. If adhered to, the minimum wage prohibits firms from cutting wages in response to falling profits. This could offer women a degree of protection against wage cuts relative to men. But it is also possible that it makes them more at risk from employers deciding instead to reduce their hours of work or not employ them at all. Second, women (particularly mothers) tend to work within a narrower radius of their home than men – presumably related to the fact that they do a greater share of tasks within the home, notably childcare – as shown by lower average commuting times. In a world where some sectors contract and others expand, it is possible that this puts women at a relative disadvantage in the crucial process of what economists call “re-allocation”: they may be less likely to find re-employment in expanding sectors if these are located in different areas to the contracting sectors.
Another crucial factor that will determine how Brexit affects the labour market outcomes of men and women is which sectors of the economy experience the most adverse impacts. This is highly uncertain and will inevitably depend on the details of the trade policy negotiations. However it is worth noting that even though women are more likely than men to work in service sectors that do not export directly to the EU, they may be ‘indirectly’ exposed to negative impacts of reduced demand from EU markets by supplying other sectors in the UK economy that do export to the EU.
If the government wants to be in the best possible position to mitigate these sorts of highly uncertain impacts, then it will need to be adaptable and responsive to evolving conditions. However, there are two major respects in which current policy is actually rather rigid.
First, the government has essentially pre-committed itself to steep changes in the minimum wage up to 2020. There is a very reasonable case to be made for a higher minimum, but no-one can claim that the impacts of a radically higher minimum are certain, not least in the light of the possible labour market upheaval mentioned above. The weakening of the evidence-based process we used to have for setting the minimum wage, whereby incremental rises were implemented and the evidence on its effects rigorously and independent assessed before going further, may turn out to be regrettable.
Second, by freezing most working-age benefits until 2020, the government has effectively set nominal benefit rates several years in advance before it knew what this would mean for their real (i.e. inflation-adjusted) value. The WBG’s report points out that the devaluation of sterling and future potential tariffs are likely to put upward pressures on the cost of living, particularly for food. Low-income working-age households are particularly exposed to such increases in living costs as the benefits freeze has broken the link between entitlement to many working-age benefits and the prices of goods and services. Due to higher-than-expected inflation, the benefits freeze has already turned out to be harsher than originally intended. Further price shocks related to Brexit would exacerbate that.
For example see McQuaid, R.W., Chen, T., 2012. Commuting times – The role of gender, children and part-time work. Research in Transportation Economics, Gender and transport: Transaction costs, competing claims and transport policy gaps 34, 66–73. Available at: https://doi.org/10.1016/j.retrec.2011.12.001
Agnes Norris Keiller is a research economist at the Institute for Fiscal Studies. She is currently researching the labour market impacts of future trade policy scenarios in work funded under the ESRC’s UK in a Changing Europe initiative.