Priti vacant

The Home Secretary, Priti Patel, sits on the right-wing of the Conservative Party and can best be described as socially illiberal (see this clip from one of the BBC’s flagship current affairs programmes in 2011 in which she quite clearly advocated the return of the death penalty). She also backed Theresa May’s hostile environment immigration policies, presented in the immigration bills of 2014 and 2016. But Patel is nothing if not entrepreneurial although her efforts to go off-piste by holding unauthorised meetings with Israeli politicians and businesspeople in 2017 did result in her being sacked from May’s government. Nonetheless, her voting record marks her out as an economic liberal, generally voting against policies such as higher taxes.

This week’s announcement by Patel that British businesses will effectively be barred from hiring “unskilled” workers from outside the UK after the Brexit transition process ends, is both socially and economically illiberal. The policy, which is outlined here, will bring in a points-based system “that will attract the high-skilled workers we need to contribute to our economy” whilst keeping out those the government presumably deems undesirable. Undoubtedly there is a preference amongst some voters for this kind of policy, as this clip reporting the views of a BBC Question Time audience member makes clear (the fact that it is both offensive and inaccurate is beside the point – this is what some people believe). However, the policy suffers from a number of theoretical and practical limitations that potentially threaten to introduce yet more economic disruption.

Starting with the macroeconomic implications, the fact that business investment has been so weak over recent years underlines the importance of labour input in driving growth. In Q4 2019, business fixed investment volumes were only 1.3% higher than mid-2016 levels – an annual increase of less than 0.4% per year. To put that into context, the average annual growth rate over the period 1966 to 2015 was 2.9% – and even that is widely considered to be too low in comparison to other European economies.

My calculations suggest that since 2015, the contribution of capital to potential GDP growth (currently estimated at around 1.5% per year) has fallen by 0.2 percentage points to 0.5 pp per annum largely due to a lack of investment which has resulted in a less efficient capital stock. Total factor productivity, which accounts for factors such as technical progress and other intangibles, has recorded a dreadful performance since 2008 and is currently not giving any boost to potential growth (chart). Thus the labour contribution accounts for a good one percentage point per annum. This can be broken down into the increase in the overall working population (0.2 pp); participation (0.2 pp); the employment rate (0.4 pp, defined as the extent to which available labour resources are being used) and hours worked (0.4 pp).

Other things being equal, measures that disrupt labour supply will act to curb the economy’s growth rate. As it is, the population is ageing and the retirement of the baby-boomers means that the working age population is growing at a slower rate than in the past. Moreover, the big boost derived in recent years from an increase in hours worked and the employment rate (number of employees relative to the total working age population) appears to be losing momentum (cf chart). Patel’s response to this problem was to suggest that any shortfalls can be met from the 8.5 million people currently classified as “economically inactive” which effectively means raising the employment rate. But of that figure, 2.3 million are classified as students; 1.9 million are looking after their family and 2.1 million are registered as long-term sick. Only 1.9 million are classified as looking for a job. This implies that the employment rate can only rise from current levels of 79.5% to a theoretical maximum of 81% – the 1.5 percentage point rise represents the amount by which it has increased over the past four years. There is a lot less slack in the labour market than the Home Secretary seems to think. 

As for a points-based system (PBS), the report from the government’s non-partisan Migration Advisory Committee (MAC) released last month was less than enthusiastic. The Committee chairman’s comments indicated that whilst he understood the government’s need to communicate complex issues to the electorate, PBS currently only represents a “soundbite” with no coherent plan as to how it would work (surprisingly enough, his contract as chairman of the MAC was not renewed). The biggest criticisms include the inconvenient fact that countries which do rely on a PBS, such as Canada and New Zealand, only use them in parts of their immigration system – it is not the bedrock. Moreover, when the UK experimented with such a system to recruit non-EU workers between 2002 and 2006, it did not attract the highly-skilled workers which the government hoped for. And as the MAC report notes, the current system to attract highly skilled workers from outside the EU “does not work well … [because] the skills bar for entry is set far too high, targeted at those at the very top of their field and is too risk averse.”

The government has accepted one of the MAC’s recommendations, to reduce the annual salary threshold from £30,000 to £25,600. Workers who do not meet the points requirement to qualify for entry must therefore meet this salary threshold – the idea being to dissuade “lower-skilled” workers from entering the UK (though as the government points out “under the points-based system for skilled workers, applicants will be able to ‘trade’ characteristics such as their specific job offer and qualifications against a lower salary”).  As if the other aspects were not contentious enough, this element threatens to open up a new can of worms. Many jobs in the health and social care area are not low-skilled at all, yet do not offer a salary which meets this threshold. A phlebotomist, for example, will struggle to earn £20,000. Full-time social care workers, of which around 20% are foreign nationals, earn around £19,500 per year – 24% below the recommended limit.

The government plans to introduce these new rules once the transition period with the EU expires at the end of this year. Not only is that not a lot of time to adjust but as Tom Hadley, director of policy at the Recruitment and Employment Confederation, said: “Jobs the government considers ‘low-skilled’ are vital to wellbeing and business growth. The announcement threatens to shut out the people we need to provide services the public rely on. We need access to workers that can help us look after the elderly, build homes and keep the economy strong.” What the policies amount to is an upgrade of the state-sponsored hostile environment which the Conservatives have pioneered over the past decade. Such an unwelcoming environment runs the risk that the UK is no longer the first port of call for talent in a world where other countries are desperate to import skills which are in short supply at home. If the government does go ahead with its introduction, my guess is that within a couple of years it will be forced to water down the restrictions.

And for all the contradictions inherent in the new rules, the biggest of them all is that Patel’s parents, who migrated to the UK from Uganda in the 1960s, would not have qualified for entry under the rules their daughter has drawn up. You could not make it up. Except that the government is indeed making it up as it goes along and runs the risk of strangling itself in a knot of contradictions.