If you want a benefit of Brexit, here it is: British employers must now innovate again

<span>Photograph: Jacob King/PA</span>
Photograph: Jacob King/PA

Strikes by nurses. Strikes by teachers. Strikes by train drivers, civil servants and college lecturers. This might not quite be a rerun of the winter of discontent 44 years ago but it is starting to look rather like it.

While it has been the standoff between the government and public sector workers that has attracted most of the media attention, there has also been widespread action in the private sector. Just this week, the Unite union announced that 180 members at the Drax power station would strike after rejecting an 8% pay offer, that tanker drivers employed by JW Suckling were balloting for industrial action, and that grounds maintenance staff on an outsourced Welwyn and Hatfield council contract had ended a lengthy dispute after securing a 13% pay increase.

Rishi Sunak may well be digging in for a war of attrition with public sector workers, but employers in the private sector are prepared to be a lot more flexible. The latest official figures show annual average growth in the private sector running at 7.2%, and while that’s still below inflation, it is more than double the 3.3% pay growth in the public sector.

The reason that private sector employers are willing to settle is clear: firms are facing a shortage of labour. Even at a time when the economy is barely growing, the number of job vacancies remains close to record levels. Agents employed by the Bank of England to take the temperature of business conditions across the UK reported last week that companies were reluctant to reduce staff levels due “to concerns they would struggle to rehire if needed”. Only a small number of firms planned redundancies.

There is no single cause for the dearth of staff. An ageing population is one factor. So is the decision by many 50- to 64-year-olds who left the labour market during the pandemic not to return. Childcare costs are a big issue here. Almost two-thirds of grandparents regularly look after their grandchildren – a sharp rise over recent decades.

Brexit is also a factor. In part, that’s because our departure from the EU is causing shortages in specific sectors such as construction and hospitality. In part, it is because employers are having to rethink how they will respond to a change in the way the UK labour market operates.

For decades, the balance of power in the workplace has been tilted heavily in favour of employers. Trade union membership has halved since its peak in the late 1970s and is concentrated in the public sector. Industrial action has been made more difficult by government legislation. And, until recently, EU membership meant firms had access to a massive pool of workers any time they needed them. As far as employers were concerned, free movement of labour was a great idea, because EU workers were highly motivated, well-educated and cheap. They provided a reserve army of labour that was useful when it came to disciplining the domestic workforce.

Striking ambulance workers marching to the House of Commons to protest against the Labour government’s 5% per cent limit for pay rises on 22 January 1979.
Striking ambulance workers marching to the House of Commons to protest against the Labour government’s 5% per cent limit for pay rises on 22 January 1979. Photograph: Central Press/Getty Images

In the end, wage negotiations come down to a question of demand and supply. If demand for workers goes up – as it did when the economy emerged from the pandemic-induced lockdowns – and supply of workers is limited, then unions have more bargaining power. If demand for labour goes up and employers can whistle up some new recruits from overseas, then union bargaining power is more limited.

The row between the government and the CBI over migrant workers illustrates how things have changed. The employers’ lobby group has been urging Sunak to grant more visas so that firms can tackle labour shortages. The prime minister says that firms should train out-of-work British workers to plug the gaps. Labour does not sound as if it would be more accommodating to employer demands either. A key reason why Keir Starmer is opposed to the UK rejoining the single market is because doing so would mean accepting free movement of workers from the EU.

It would be wrong to exaggerate the impact of all this. Brexit is just one – and not the most important – reason behind the present shortage of labour. What’s more, the CBI has a point when it says that training UK workers is no real answer to job vacancies that need filling now. There is a case, even with tougher migration controls, for more time-limited visas for workers with specific skills.

That said, the end of free movement has implications both for pay bargainers and the wider economy. Wage awards are not keeping pace with price increases, even at a time when unemployment is below 4% and vacancies are plentiful, but settlements would be even lower if employers had fewer problems finding labour.

In the end, employers will respond in one of three ways. They will accept that workers have more clout and pay them more. They will take on the challenge of equipping people on benefits who want to work with the skills necessary to hold down a job. Finally, they will invest in new machinery as the cost of labour increases relative to the cost of capital.

The last point is important. While there are undoubtedly short-term costs of restrictions on free movement of EU labour, there is also an opportunity to break with an economic model that relied too heavily on access to a deep pool of cheap labour. Previously, firms had no real incentive to invest more in new kit, which is a reason the UK’s recent productivity record has been so poor. Now they do.

  • Larry Elliott is the Guardian’s economics editor