Category: Essentials of Economics: Ch 14

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Unlocking happiness: how jobs shape young lives in developing nations

Have you ever wondered how your job affects your happiness? We all know that not all jobs are created equal. Some are awesome, while others … not so much. Well, it turns out that employment status and the type of work you do can have a big impact on how you feel – especially in developing countries where labour markets are usually tighter and switching between jobs can be more difficult.

A recent study by Carmichael, Darko and Vasilakos (2021) uses survey data from Ethiopia, Peru, India and Vietnam to answer this very question. The study found that the quality of work is a big deal when it comes to how young people feel. Not all jobs are ‘good jobs’ that automatically make you feel great. Although your wellbeing is likely to be higher when you’re in employment than when you’re not, there are certain job attributes that can push that ‘employment premium’ up or down. This is especially important to understand in countries like many in sub-Saharan Africa, where there aren’t many formal jobs, and people often end up overqualified for what they do.

What job attributes lead to higher wellbeing?

What then are the job attributes that are correlated with higher levels of wellbeing? The first is money: Okay, we know money can’t buy happiness, but it can certainly make life easier. We were therefore hardly surprised to find a positive and statistically significant association between hourly earnings and wellbeing.

We were also not surprised to find that a ‘poor working environment’ has a strong and highly significant negative effect on wellbeing.

Finally, feeling proud of your work is also found to be a strongly significant determinant of your wellbeing. After all, people tend to excel in things they like doing, which is probably part of the ‘transmission mechanism’ between ‘work pride’ and ‘subjective wellbeing’.

Which one of these attributes did you think had the greatest effect on wellbeing? Let me guess, many of you will say ‘earnings’. But then you would be wrong. Earnings were indeed positively associated with wellbeing and statistically significant at just about the 10% level, whereas work pride was very strongly statistically significant at the 1% level and had an effect on wellbeing that was four times greater than hourly earnings.

Putting yourself in a poor working environment on the other hand would reduce your wellbeing by almost twice as much as the earnings coefficient.

Policy implications

What does all this mean for policy-makers? If we want to make life better for young people in low-income countries, we need to tackle the problems from multiple angles.

First, young people need to be helped to get the skills they need for the job market. This can be done through things like training programmes and apprenticeships. However, not all of these programmes are created equal. Some have great results, and others not so much.

But that’s not the whole story. In many countries, there’s a massive informal job market. It’s a place where people work but often don’t have the rights or protections that formal employees do. So, even if young people get trained, they might not find the ‘good’ jobs they’re hoping for.

Changes also need to be made on a much bigger scale. This often includes decentralising public investment to include rural areas, improving infrastructure, and encouraging private investment. Strengthening labour market rules and social protection can help too, by making sure that work is safe and fair.

In a nutshell, where you work and what kind of work you do can make a big difference to how you feel.

Conclusions

If policy-makers want to help young people in low-income countries, they need both to give them the skills they require and to create better job opportunities. But policy-makers also need to make bigger changes to the way things work, like boosting production and making sure jobs are safe and fair.

In the end, it’s about making life better for young people around the world. Let’s keep working on it!

Articles

Questions

  1. How does the quality of work impact the happiness and wellbeing of young people in low- and middle-income countries (LMICs), and why is this significant in the context of job opportunities in sub-Saharan Africa?
  2. What are some potential solutions and strategies discussed in the article for improving the wellbeing of young people in LMICs, particularly in the context of employment and job opportunities?
  3. Have you ever experienced a job that significantly (positively or negatively) impacted your wellbeing or happiness? Reflect on your experience and how it influenced your overall life satisfaction?
  4. How is AI likely to affect the wellbeing of young professional workers?
  5. How is the pandemic likely to have affected job satisfaction?
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Chinese economic woes

China has been an economic powerhouse in recent decades – a powerhouse that has helped to drive the world economy through trade and both inward and outward investment. At the same time, its low-priced exports have helped to dampen world inflation. But is all this changing? Is China, to use President Biden’s words, a ‘ticking time bomb’?

China’s economic growth rate is slowing, with the quarterly growth in GDP falling from 2.2% in Q1 this year to 0.8% in Q2. Even though public-sector investment rose by 8.1% in the first six months of this year, private-sector investment fell by 0.2%, reflecting waning business confidence. And manufacturing output declined in August. But, despite slowing growth, the Chinese government is unlikely to use expansionary fiscal policy because of worries about growing public-sector debt.

The property market

One of the biggest worries for the Chinese economy is the property market. The annual rate of property investment fell by 20.6% in June this year and new home prices fell by 0.2% in July (compared with June). The annual rate of price increase for new homes was negative throughout 2022, being as low as minus 1.6% in November 2022; it was minus 0.1% in the year to July 2023, putting new-home prices at 2.4% below their August 2021 level. However, these are official statistics. According to the Japan Times article linked below, which reports Bloomberg evidence, property agents and private data providers report much bigger falls, with existing home prices falling by at least 15% in many cities.

Falling home prices have made home-owners poorer and this wealth effect acts as a brake on spending. The result is that, unlike in many Western countries, there has been no post-pandemic bounce back in spending. There has also been a dampening effect on local authority spending. During the property boom they financed a proportion of their spending by selling land to property developers. That source of revenue has now largely dried up. And as public-sector revenues have been constrained, so this has constrained infrastructure spending – a major source of growth in China.

The government, however, has been unwilling to compensate for this by encouraging private investment and has tightened regulation of the financial sector. The result has been a decline in new jobs and a rise in unemployment, especially among graduates, where new white collar jobs in urban areas are declining. According to the BBC News article linked below, “In July, figures showed a record 21.3% of jobseekers between the ages of 16 and 25 were out of work”.

Deflation

The fall in demand has caused consumer prices to fall. In the year to July 2023, they fell by 0.3%. Even though core inflation is still positive (0.8%), the likelihood of price reductions in the near future discourages spending as people hold back, waiting for prices to fall further. This further dampens the economy. This is a problem that was experienced in Japan over many years.

Despite slowing economic growth, Chinese annual growth in GDP for 2023 is still expected to be around 4.5% – much lower than the average rate for 9.5% from 1991 to 2019, but considerably higher than the average of 1.1% forecast for 2023 for the G7 countries. Nevertheless, China’s exports fell by 14.5% in the year to July 2023 and imports fell by 12.5%. The fall in imports represents a fall in exports to China from the rest of the world and hence a fall in injections to the rest-of-the-world economy. Currently China’s role as a powerhouse of the world has gone into reverse.

Articles

Questions

  1. Using PowerPoint or Excel, plot the growth rate of Chinese real GDP, real exports and real imports from 1990 to 2024 (using forecasts for 2023 and 2024). Use data from the IMF’s World Economic Outlook database. Comment on the figures.
  2. Explain the wealth effect from falling home prices.
  3. Why may official figures understate the magnitude of home price deflation?
  4. Explain the foreign trade multiplier and its relevance to other countries when the volume of Chinese imports changes. What determines the size of this multiplier for a specific country?
  5. How does the nature of the political system in China affect the likely policy response to the problems identified in this blog?
  6. Is there any good news for the rest of the world from the slowdown in the Chinese economy?
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What does 2023 have in store for the UK economy?

Last year was far from the picture of economic stability that all governments would hope for. Instead, the overarching theme of 2022 was uncertainty, which overshadowed many economic predictions throughout the year. The Collins English Dictionary announced that their word of the year for 2022 is ‘permacrisis’, which is defined as ‘an extended period of instability and insecurity’.

For the UK, 2022 was an eventful year, seeing two changes in prime minister, economic stagnation, financial turmoil, rampant inflation and a cost of living crisis. However, the UK was not alone in its economic struggles. Many believe that it is a minor miracle that the world did not experience a systemic financial crisis in 2022.

Russia’s invasion of Ukraine has led to the biggest land war in Europe since 1945, the most serious risk of nuclear escalation since the Cuban missile crisis and the most far-reaching sanctions regime since the 1930s. Soaring food and energy costs have fuelled the highest rates of inflation since the 1980s and the biggest macroeconomic challenge in the modern era of central banking (with the possible exception of the financial crisis of 2007–8 and its aftermath). For decades we have lived with the assumptions that nuclear war was never going to happen, inflation will be kept low and rich countries will not experience an energy crisis. In 2022 all of these assumptions and more have been shaken.

With the combination of rising interest rates and a massive increase in geopolitical risk, the world economy did well to survive as robustly as it did. However, with public and private debt having risen to record levels during the now-bygone era of ultra-low interest rates and with recession risks high, the global financial system faces a huge stress test.

Government pledges

Rishi Sunak, the UK Prime Minister, started 2023 by setting out five pledges: to halve inflation, boost economic growth, cut national debt as a percentage of GDP, and to address NHS waiting lists and the issue of immigrants arriving in small boats. Whilst most would agree that meeting these pledges is desirable, a reduction in inflation is forecast to happen anyway, given the monetary policy being pursued by the Bank of England and an easing of commodity prices; and public-sector debt as a percentage of GDP is forecast to fall from 2024/25.

Success in meeting the first four pledges will partly depend on the effects of the current industrial action by workers across the UK. How soon will the various disputes be settled and on what terms? What will be the implications for service levels and for inflation?

A weak global economy

Success will also depend on the state of the global economy, which is currently very fragile. In fact, it is predicted that a third of the global economy will be hit by recession this year. The head of the IMF has warned that the world faces a ‘tougher’ year in 2023 than in the previous 12 months. Such comments suggest the IMF is likely soon to cut its economic forecasts for 2023 again. The IMF already cut its 2023 outlook for global economic growth in October, citing the continuing drag from the war in Ukraine, as well as inflationary pressures and interest rate rises by major central banks.

The World Bank has also described the global economy as being ‘on a razor’s edge’ and warns that it risks falling into recession this year. The organisation expects the world economy to grow by just 1.7% this year, which is a sharp fall from an estimated 2.9% in 2022 according to the Global Economic Prospects report (see link below). It has warned that if financial conditions tighten, then the world’s economy could easily fall into a recession. If this becomes a reality, then the current decade would become the first since the 1930s to include two global recessions. Growth forecasts have been lowered for 95% of advanced economies and for more than 70% of emerging market and developing economies compared with six months ago. Given the global outlook, it is no surprise that the UK economy is expected to face a prolonged recession with declining growth and increased unemployment.

The current state of the UK economy

Despite all the concerns, official figures show that, even though households have been squeezed by rising prices, UK real GDP unexpectedly grew in November, by 0.1%. This has been explained by a boost to bars and restaurants from the World Cup as people went out to watch the football and also by demand for services in the tech sector.

At first sight, the UK’s cost of living crisis might look fairly mild compared to other countries. Its inflation rate was 10.7% in November 2022, compared to 12.6% in Italy, 16% in Poland and over 20% in Hungary and Estonia. But UK inflation is still way above the Bank of England’s 2% target. The Bank went on to tighten monetary policy further, by increasing interest rates to 3.5% in December. Further rate rises are expected in 2023. In fact, the markets and the Bank both expect the main rate to reach 5.2% by the end of this year. With the consequent squeeze on real incomes, the Bank of England expects a recession in the UK this year – possibly lasting until mid-2024.

The UK is also affected by global interest rates, which affect global growth. Global interest rates average 5%. A 1 percentage point increase would reduce global growth this year from 1.7% to 0.6%, with per capita output contracting by 0.3%, once changes in population are taken into account. This would then meet the technical definition of a global recession. This means that the Bank’s November economic forecast, which was based on a Bank Rate of 3%, may worsen due to an even larger contraction than previously expected. The resulting drop in spending and investment by people and businesses could then cause inflation to come down faster than the Bank had predicted when rates were at 3%.

There could be some positive news however, that may help bring down inflation in addition to rate rises. There has been some appreciation in the pound since the huge drop caused by the September mini-budget that had brought its value to a nearly 40-year low. This will help to reduce inflation by reducing the price of imports.

As far as workers are concerned, pay increases have been broadly contained, with 2022 being one of the worst years in decades for UK real wage growth. Limiting pay rises can have a deflationary effect because people have less to spend, but it also weighs on economic growth and productivity. Despite the impact on inflation, there is a lot of unrest across the UK, with strike action continuing to be at the forefront of the news. Strikes over pay and conditions continue in various sectors in 2023, including transport, health, education and the postal service. Strikes and industrial action have a negative effect on the wider economy. If wages are stagnating and the economy is not performing well, productivity will suffer as workers are less motivated and less investment in new equipment takes place.

Financial stresses

The UK economy is also under threat of a prolonged recession due to the proportion of households that lack insulation against financial setbacks. This proportion is unusually large for a wealthy economy. A survey conducted prior to the pandemic, found that 3 million people in the UK would fall into poverty if they missed one pay cheque, with the country’s high housing costs being a key source of vulnerability. Another survey recently suggested that one-third of UK adults would struggle if their costs rose by just £20 a month.

The pandemic itself meant that over 4 million households have taken on additional debt, with many now falling behind on repaying it. This, combined with recent jumps in energy and food bills, could push many over the edge, especially if heating costs remain high when the present government cap on energy prices ends in April.

However, there could be some better news for households with the easing of COVID restrictions in China. This could have a positive impact on the UK economy if it helps ease supply-chain disruptions occurring since the height of the global pandemic. It could reduce inflationary pressure in the UK and other countries that trade with China by making it easier – and therefore less costly – for people to get hold of goods.

Articles

Reports

Questions

  1. Define the term ‘deflation’.
  2. Explain how an appreciation of the pound is good for inflation.
  3. Discuss the wider economic impacts of industrial strike action.
  4. Why is it important for the government to keep wages contained?
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The growth of autarky: is globalisation dead?

Over the decades, economies have become increasingly interdependent. This process of globalisation has involved a growth in international trade, the spread of technology, integrated financial markets and international migration.

When the global economy is growing, globalisation spreads the benefits around the world. However, when there are economic problems in one part of the world, this can spread like a contagion to other parts. This was clearly illustrated by the credit crunch of 2007–8. A crisis that started in the sub-prime market in the USA soon snowballed into a worldwide recession. More recently, the impact of Covid-19 on international supply chains has highlighted the dangers of relying on a highly globalised system of production and distribution. And more recently still, the war in Ukraine has shown the dangers of food and fuel dependency, with rapid rises in prices of basic essentials having a disproportionate effect on low-income countries and people on low incomes in richer countries.

Moves towards autarky

So is the answer for countries to become more self-sufficient – to adopt a policy of greater autarky? Several countries have moved in this direction. The USA under President Trump pursued a much more protectionist agenda than his predecessors. The UK, although seeking new post-Brexit trade relationships, has seen a reduction in trade as new barriers with the EU have reduced UK exports and imports as a percentage of GDP. According to the Office for Budget Responsibility’s November 2022 Economic and Fiscal Outlook, Brexit will result in the UK’s trade intensity being 15 per cent lower in the long run than if it had remained in the EU.

Many European countries are seeking to achieve greater energy self-sufficiency, both as a means of reducing reliance on Russian oil and gas, but also in pursuit of a green agenda, where a greater proportion of energy is generated from renewables. More generally, countries and companies are considering how to reduce the risks of relying on complex international supply chains.

Limits to the gains from trade

The gains from international trade stem partly from the law of comparative advantage, which states that greater levels of production can be achieved by countries specialising in and exporting those goods that can be produced at a lower opportunity cost and importing those in which they have a comparative disadvantage. Trade can also lead to the transfer of technology and a downward pressure on costs and prices through greater competition.

But trade can increase dependence on unreliable supply sources. For example, at present, some companies are seeking to reduce their reliance on Taiwanese parts, given worries about possible Chinese actions against Taiwan.

Also, governments have been increasingly willing to support domestic industries with various non-tariff barriers to imports, especially since the 2007–8 financial crisis. Such measures include subsidies, favouring domestic firms in awarding government contracts and using regulations to restrict imports. These protectionist measures are often justified in terms of achieving security of supply. The arguments apply particularly starkly in the case of food. In the light of large price increases in the wake of the Ukraine war, many countries are considering how to increase food self-sufficiency, despite it being more costly.

Also, trade in goods involves negative environmental externalities, as freight transport, whether by sea, air or land, involves emissions and can add to global warming. In 2021, shipping emitted over 830m tonnes of CO2, which represents some 3% of world total CO2 emissions. In 2019 (pre-pandemic), the figure was 800m tonnes. The closer geographically the trading partner, the lower these environmental costs are likely to be.

The problems with a globally interdependent world have led to world trade growing more slowly than world GDP in recent years after decades of trade growth considerably outstripping GDP growth. Trade (imports plus exports) as a percentage of GDP peaked at just over 60% in 2008. In 2019 and 2021 it was just over 56%. This is illustrated in the chart (click here for a PowerPoint). Although trade as a percentage of GDP rose slightly from 2020 to 2021 as economies recovered from the pandemic, it is expected to have fallen back again in 2022 and possibly further in 2023.

But despite this reduction in trade as a percentage of GDP, with de-globalisation likely to continue for some time, the world remains much more interdependent than in the more distant past (as the chart shows). Greater autarky may be seen as desirable by many countries as a response to the greater economic and political risks of the current world, but greater autarky is a long way from complete self-sufficiency. The world is likely to remain highly interdependent for the foreseeable future. Reports of the ‘death of globalisation’ are premature!

Podcasts

Articles

Report

Questions

  1. Explain the law of comparative advantage and demonstrate how trade between two countries can lead to both countries gaining.
  2. What are the main economic problems arising from globalisation?
  3. Is the answer to the problems of globalisation to move towards greater autarky?
  4. Would the expansion/further integration of trading blocs be a means of exploiting the benefits of globalisation while reducing the risks?
  5. Is the role of the US dollar likely to decline over time and, if so, why?
  6. Summarise Karl Polanyi’s arguments in The Great Transformation (see the Daniel W. Drezner article linked below). How well do they apply to the current world situation?
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The costs of Brexit: a clearer picture

At the time of the 2016 referendum, the clear consensus among economists was that Brexit would impose net economic costs on the UK economy. The size of these costs would depend on the nature of post-Brexit trading relations with the EU. The fewer the new barriers to trade and the closer the alignment with the EU single market, the lower these costs would be.

The Brexit deal in the form of the EU-UK Trade and Cooperation Agreement (see also) applied provisionally from January 2021, after the end of the transition period, and came into force in May 2021. Although this is a free-trade deal in the sense that goods made largely in the UK or EU can be traded tariff-free between the two, the deal does not apply to services (e.g. financial services) or to goods where components made outside the UK or EU account for more than a certain percentage (the ‘rules of origin‘ condition). Also there has been a huge increase in documentation that must be completed to export to or import from the EU.

Even though the nature of the Brexit deal has been clear since it was signed in December 2020, assessing the impact of the extra barriers to trade it has created has been hard given the various shocks that have had a severe impact on the UK (and global) economy. First COVID-19 and the associated lockdowns had a direct effect on output and trade; second the longer-term international supply-chain disruptions have extended the COVID costs beyond the initial lockdowns and acted as a brake on recovery and growth; third the Russian invasion of Ukraine imposed a severe shock to energy and food markets; fourth these factors have created not just a supply shock but also an inflationary shock, which has resulted in central banks seeking to dampen demand by significantly raising interest rates. One worry among analysts was that the negative effects of such shocks might be greater on the UK economy than on other countries.

However, the negative effects of Brexit are now becoming clearer and various institutions have attempted to quantify the costs. These costs are largely in terms of lower GDP than otherwise. This results from:

  • reduced levels of trade with the EU, thereby reducing the gains from exploiting comparative advantage;
  • increased costs of trade with the EU;
  • disruptions to supply chains;
  • reduced competition from European firms, with many no longer exporting to the UK because of the costs;
  • reduced inward investment;
  • labour market shortages, particularly in certain areas such a hospitality, construction, social care and agriculture as many European workers have left the UK and fewer come;
  • a reduction in productivity.

Here is a summary of the findings of different organisations.

The Office for Budget Responsibility (OBR)

The OBR has argued that Brexit as negotiated in the Trade and Cooperation Agreement:

will reduce long-run productivity by 4 per cent relative to remaining in the EU. This largely reflects our view that the increase in non-tariff barriers on UK-EU trade acts as an additional impediment to the exploitation of comparative advantage.21

In addition the OBR estimates that:

Both exports and imports will be around 15 per cent lower in the long run than if the UK had remained in the EU.21

Recent evidence supports this. According to the OBR:

UK and aggregate advanced economy goods export volumes fell by around 20 per cent during the initial wave of the pandemic in 2020. But by the fourth quarter of 2021 total advanced economy trade volumes had rebounded to 3 per cent above their pre-pandemic levels while UK exports remain around 12 per cent below.22

This assumption was repeated in the November 2022 Economic and Fiscal Outlook (p.26) 23. What is more, new trade deals will make little difference, either because they are a roll-over from previous EU trade deals with the respective country or have only a very small effect (e.g. the trade deal with Australia).

The Bank of England

The Bank of England, ever since the referendum in 2016, has forecast that Brexit would damage trade, productivity and GDP growth. In recent evidence to the House of Commons Treasury Committee5, Andrew Bailey, the Governor, stated that previous work by the Bank concluded that Brexit would reduce productivity by a bit over 3% and that this was still the Bank’s view.

His colleague, Dr Swati Dhingra, stated that, because of Brexit, there was a ‘much bigger slowdown in trade in the UK compared to the rest of the world’. She continued:

The simple way of thinking about what Brexit has done to the economy is that in the period after the referendum, the biggest depreciation that any of the world’s four major economies have seen overnight contributed to increasing prices [and] reduced wages. …We think that number is about 2.6% below the trend that real wages would have been on. Soon afterwards and before the TCA happened came the effects of the uncertainty that was unleashed, which basically translates into reduced business investment and less certainty of the FDI effects. Those tend to be very long-pay things.

She continued that now we are seeing significantly reduced trade directly as a result of the Brexit trade agreement (TCA).

Her colleague, Dr Catherine Mann, argued that ‘the small firms are the ones that are the most damaged, because the cost of the paperwork and so forth is a barrier’. This does not only affect UK firms exporting to the EU but also EU firms exporting to the UK. Reduced imports from EU firms reduces competition in the UK, which tends to lead to higher prices.

The Institute for Fiscal Studies

The IFS has consistently argued that Brexit, because of increased trade barriers with the EU, has reduced UK trade, productivity and GDP. In a recent interview6, its Director, Paul Johnson, stated that ‘Brexit, without doubt, has made us poorer than we would otherwise have been’. That, plus other convulsions, such as the mini-Budget of October 2022, have reduced foreigners’ confidence in the UK, with the result that investment in the UK and trade with the rest of the world have fallen.

Resolution Foundation

In a major Resolution Foundation report24, the authors argued that the effects of Brexit will take time to materialise fully and will occur in three distinct phases. First, in anticipation of permanent effects, the referendum caused sterling to depreciate and this adversely affected household incomes. What is more, the uncertainty about the future caused business investment to fall (but not inward FDI). Second, the Trade and Cooperation Act, by introducing trade barriers, reduced UK trade with the EU. But trade with the rest of the world also fell suggesting that Brexit is impacting UK trade openness and competitiveness more broadly. Third, there will be structural changes to the UK economy over the long-term which will adversely affect economic growth:

A less-open UK will mean a poorer and less productive one by the end of the decade, with real wages expected to fall by 1.8 per cent, a loss of £470 per worker a year, and labour productivity by 1.3 per cent, as a result of the long-run changes to trade under the TCA. This would be equivalent to losing more than a quarter of the last decade’s productivity growth.

Nuffield Trust

One of the key effects of Brexit has been on the labour market and especially on sectors, such as hospitality, agriculture, construction, health and social care. These sectors are experiencing labour shortages, in part due to EU nationals leaving the UK. In 2021, the Nuffield Trust looked at the supply of workers in health and social care25 and found that, as a result of increased bureaucratic hurdles, the number of EU/EFTA-trained nurses had declined since 2016. In social care, new immigration rules have made it virtually impossible to recruit from the EU. A more recent report looked at the recruitment of doctors in four specific specialties.26 In each case, although the number recruited from the EU/EFTA was still increasing, the rate of increase had slowed significantly. The reason appeared to be Brexit not COVID-19.

Ivalua

Research by Coleman Parkes for Ivalua18 shows that 80% of firms found Brexit to have been the biggest cause of supply-chain disruptions in the 12 months to August 2022, with 83% fearing the biggest disruptions from Brexit are yet to come. Brexit was found to have had a bigger effect on supply chains than the war in Ukraine, rising energy costs and COVID-19.

Centre for European Reform

Modelling conducted by John Springford27 used a ‘doppelgängers’ method to show the effects of Brexit on the UK economy. Each doppelgänger is ‘a basket of countries whose economic performance closely matches the UK’s before the Brexit referendum and the end of the transition period’. Comparing the UK’s performance with the doppelgänger can show the difference between leaving and not leaving the UK. Doppelgängers were estimated for GDP, investment (gross fixed capital formation), total services trade (exports plus imports) and total goods trade (ditto).

The results are sobering. In the final quarter of 2021, UK GDP is 5.2 per cent smaller than the modelled, doppelgänger UK; investment is 13.7 per cent lower; and goods trade, 13.6 per cent lower.

Economic and Social Research Institute (ESRI) (Ireland)

Similar results for UK trade have been obtained by Janez Kren and Martina Lawless in research conducted for the ESRI.28 They used product-level trade flows between the EU and all other countries in the world as a comparison group. This showed a 16% reduction in UK exports to the EU and a 20% reduction in UK imports from the EU relative to the scenario in which Brexit had not occurred.

British Chambers of Commerce (BCC) survey

According to a BCC survey of 1168 businesses33, 92% of which are SMEs, more than three quarters (77%) for which the Brexit deal is applicable say it is not helping them increase sales or grow their business and 56% say they have difficulties in adapting to the new rules for trading goods. The survey shows that UK firms are facing significant challenges in trying to trade with EU countries under the terms of the Trade and Cooperation Agreement. What is more, 80% of firms had seen the cost of importing increase; 53% had seen their sales margins decrease; and almost 70% of manufacturers had experienced shortages of goods and services from the EU.

Academic studies

Research at the Centre for Business Prosperity, Aston University, by Jun Du, Emine Beyza Satoglu and Oleksandr Shepotylo20, 29 found that UK exports to the EU ‘fell by an average of 22.9% in the first 15 months after the introduction of the EU-UK Trade and Cooperation Agreement’. The negative effect on UK exports persisted and deepened from January 2021 to March 2022. The research involved comparing actual trade with an ‘alternative UK economy’ model based on the UK having remained in the EU. What is more, the researchers found that there had been a reduction of 42% in the number of product varieties exported to the EU, with a large number of exporters simply ceasing to export to the EU and with many of the remaining exporters streamlining their product ranges.

Research at the LSE’s Centre for Economic Performance by Jan David Bakker, Nikhil Datta, Richard Davies and Josh De Lyon31 found that leaving the EU added an average of £210 to UK household food bills over the two years to the end of 2021. This amounted to a total cost to consumers of £5.8 billion. This confirmed the findings of previous research30 that the increase in UK-EU trade barriers led to food prices in the UK being 6% higher than they would have been.

Finally, a report from the Migration Observatory at the University of Oxford32 examined the effects of the ending of the free movement of labour from the EU to the UK. Visas are now required, but ‘low-wage occupations that used to rely heavily on EU workers are now ineligible for work visas, with some limited exceptions for social care and seasonal workers’. Many industries are facing labour shortages. Reasons include other factors, such as low pay and unattractive working conditions, and workers leaving the workforce during the pandemic and afterwards. But the end of free movement appears to have exacerbated these existing problems.

References

    Videos

  1. The Brexit effect: how leaving the EU hit the UK

    2. Financial Times film (18/10/22)

  2. What impact is Brexit having on the UK economy?

    3. Brexit and the UK economy, Ros Atkins (29/10/22)

  3. Why Brexit is damaging the UK economy both now and in the future

    4. Economics Help on YouTube, Tejvan Pettinger (5/12/22)

  4. Why the Costs of Brexit keep growing for the UK economy

    5. Economics Help on YouTube, Tejvan Pettinger (17/10/22)

  5. Treasury Committee (see also)

    6. Parliament TV (25/11/22) (see 15:03:00 to 15:08:12) (Click here for a transcript: see Q637 to Q641)

  6. UK economy made worse by ‘own goals’ like Brexit and Truss mini-budget, IFS economist says

    7. Sky News, Paul Johnson (IFS) (18/11/22)

    Articles

  7. Brexit and the economy: the hit has been ‘substantially negative’

    8. Financial Times, Chris Giles (30/11/22)

  8. ‘What have we done?’: six years on, UK counts the cost of Brexit

    9. The Observer, Toby Helm, Robin McKie, James Tapper & Phillip Inman (25/6/22)

  9. Brexit did hurt the City’s exports – the numbers don’t lie

    10. Financial News, David Wighton (9/11/22)

  10. Brits are starting to think again about Brexit as the economy slides into recession

    11. CNBC, Elliot Smith (23/11/22)

  11. Brexit has cracked Britain’s economic foundations

    12. CNN, Hanna Ziady (24/12/22)

  12. Mark Carney: ‘Doubling down on inequality was a surprising choice’

    13. Financial Times, Edward Luce (14/10/22)

  13. Brexit: Progress on trade deals slower than promised

    14. BBC News, Ione Wells & Brian Wheeler (2/12/22)

  14. How Brexit costs this retailer £1m a month in sales

    15. BusinessLive, Tom Pegden (22/11/22)

  15. Brexit Is Hurting The UK Economy, Bank Of England Official Says

    16. HuffPost, Graeme Demianyk (16/11/22)

  16. Brexit and drop in workforce harming economic recovery, says Bank governor

    17. The Guardian, Richard Partington (16/11/22)

  17. Brexit a major cause of UK’s return to austerity, says senior economist

    18. The Guardian, Anna Isaac (14/11/22)

  18. 80% of UK businesses say Brexit caused the biggest supply chain disruption in the last 12 months

    19. Ivalua (28/11/22)

  19. Brexit added £210 to household food bills, new research finds

    20. Sky News, Faye Brown (1/12/22)

  20. Brexit changes caused 22.9% slump in UK-EU exports into Q1 2022 – research

    21. Expertfile (8/12/22)

    Research and analysis

  21. Brexit analysis

    22. OBR (26/5/22)

  22. The latest evidence on the impact of Brexit on UK trade

    23. OBR (March 2022)

  23. Economic and fiscal outlook – November 2022 (PDF)

    24. OBR (17/11/22)

  24. The Big Brexit (PDF)

    25. Resolution Foundation, Swati Dhingra, Emily Fry, Sophie Hale & Ningyuan Jia (June 2022)

  25. Going it alone: health and Brexit in the UK

    26. Nuffield Trust, Mark Dayan, Martha McCarey, Tamara Hervey, Nick Fahy, Scott L Greer, Holly Jarman, Ellen Stewart and Dan Bristow (20/12/21)

  26. Has Brexit affected the UK’s medical workforce?

    27. Nuffield Trust, Martha McCarey and Mark Dayan (27/11/22)

  27. What can we know about the cost of Brexit so far?

    28. Centre for European Reform, John Springford (9/6/22)

  28. Brexit reduced overall EU-UK goods trade flows by almost one-fifth

    29. Economic and Social Research Institute (Ireland), Janez Kren and Martina Lawless (19/10/22)

  29. Post-Brexit UK Trade – An Update (PDF)

    30. Centre for Business Prosperity, Aston University, Jun Du, Emine Beyza Satoglu and Oleksandr Shepotylo (November 2022)

  30. Post-Brexit imports, supply chains, and the effect on consumer prices (PDF)

    31. UK in a Changing Europe, Jan David Bakker, Nikhil Datta, Josh De Lyon, Luisa Opitz and Dilan Yang (25/4/22)

  31. Non-tariff barriers and consumer prices: evidence from Brexit

    32. Centre for Economic Performance, LSE, Jan David Bakker, Nikhil Datta, Richard Davies and Josh De Lyon (December 2022)

  32. How is the End of Free Movement Affecting the Low-wage Labour Force in the UK?

    33. Migration Observatory, University of Oxford, Madeleine Sumption, Chris Forde, Gabriella Alberti and Peter William Walsh (15/8/22)

  33. The Trade and Cooperation Agreement: Two Years On – Proposals For Reform by UK Business

    34. British Chambers of Commerce (21/12/22)

  34. The Detriments of Brexit

    35. Yorkshire Bylines (June 2022) (see also)

Questions

  1. Summarise the negative effects of Brexit on the UK economy.
  2. Why is it difficult to quantify these effects?
  3. Explain the ‘doppelgängers’ method of estimating the costs of Brexit? How reliable is this method likely to be?
  4. How have UK firms attempted to reduce the costs of exporting to the EU?
  5. Is Brexit the sole cause of a shortage of labour in many sectors in the UK?