A less flexible Britain
Last Thursday saw the release of robust UK retail sales data for April that reversed a weakening trend and pointed to the consumer staying strong. So it was notable that on a day that confirmed British economic resilience despite attendant uncertainties, Prime Minister Theresa May effectively renounced those free market policies that since Margaret Thatcher’s time have been core tenants of the Conservative Party credo.
The Tories launched their manifesto for the UK general election with pledges to cap energy prices, regulate executive pay, police foreign takeovers and set demanding immigration quotas. Perhaps most significantly, a Theresa May-led government will match the Labour Party in boosting the minimum wage and has indicated a willingness to dial back highly flexible provisions in the UK labour market, which have helped keep unemployment low and support the socalled gig economy.
May herself rejects any notion of a new “Mayism”, but what she articulates is a very British style of nationalisttinged economic populism. Moreover, she faces almost no pushback, as free market Tories see her lurch left as the acceptable price of securing a clean (i.e. hard) Brexit. For their part, fretful business leaders increasingly struggle to get a hearing, without being stereotyped as Dickensian villains acting against the public good.
Having rejected the post-WWII consensus for statist control in favour of market-based solutions, Britain tends to lead in economic fashions.
As such, its performance under a more interventionist hand may have wider significance. May’s ambition seems to be for a new kind of “technocratic populism” that legitimises intervention on efficiency grounds, rather than old-school redistribution. Moreover, with Britain having seen political party affiliations based on economic class collapse since the Brexit vote, May has space to drive an agenda that defies standard left-right labels.
A key testing ground for this approach will be the labour market whose flexibility helped the UK avoid unemployment and stagnation after the 2008 crisis. British firms can hire and fire with limited costs and unlike in France or Italy, wages are mostly set at the firm — rather than industry — level, making them mostly a function of profits. This rapid response mechanism offers a form of worker protection, as if one job is lost another can be quickly found. It is one reason why the UK labour market, unlike many on the continent, has a high participation rate across all age groups.
The challenge for the UK looking ahead will be headwinds from sterling’s big devaluation. Wage growth in March barely beat inflation and with CPI in April hitting 2.7%, real wage growth is likely to again turn negative. To be sure, the average wage index combines both public and private sector wages, with the former depressed by government restraints, while the latter is on a rising trend as the labour market tightens. However, going forward, the net-effect is likely to be weaker consumption, especially as UK households’ savings rate has reached a worryingly low level.
Absent a step change in UK productivity, there is no easy solution to this squeeze on incomes. The one available mechanism for managing the adjustment is a flexible labor market, as it allows firms to adapt to changed circumstances and households to maintain an income stream, even if they face disruption due to employment loss.
On this score, there was an irony to manifesto pledge to cut inward migration thousands.
Over the last decade, it was the very flexibility of the UK’s job market that helped attract so many workers from the European Union. Now that it is set to bid farewell to the EU, Britain seems set on importing European-style labor codes. And it may be this development, rather than notoriously hard to police immigration caps, that reverses the movement of workers across the English Channel. Theresa May’s to the tens of