Scrubbing up
Britain may need to look to Germany’s labour laws
It might not look like much, but the Magic Carpet Car Wash in Dundalk, Ireland, is the kind of business economists should study. I visited earlier this year when doing research on the Irish border and the trip stuck in my mind.
Unlike the car washes I remember as a kid, in which robotic bristles descend and scrub the car clean automatically, this one was staffed by workers. On the forecourt were two men from Eastern Europe spraying cars with power hoses. On the other side of a fence, two electricians were installing a system that would replace the workers I had just seen.
According to Killian Cawley, of PE Services, the car wash was responding to a drop in the supply of cheap labour. Dundalk is close to the border in Ireland, and, just like many British regions, it has seen a fall in the influx of foreign workers since the Brexit vote.
The Magic Carpet Car Wash model had relied on cheap labour that was drying up. So, in a textbook case of productivity improvement, it had called up PE Services and made a capital investment.
The kit PE was installing was simple – a set of pipes and sensors that would spray the car as it passed through. But it would reduce the workers needed from 10 to four while doubling the speed at which cars could go through.
What I’ve described should be impossible. For the past 10 years, it has been an article of faith that high immigration generates productivity improvement and is not a substitute for it. Data has shown a correlation between immigration and aggregate wage growth, even if some studies show a small negative effect at the bottom of the workforce, and Blairite thinkers like Jonathan Portes have relentlessly promoted the idea that questioning these models is nothing but a cover for xenophobia and racism.
Now, though, the orthodoxy is changing. Christopher Bickerton, a Left-wing Cambridge politics lecturer and Brexit supporter, has written a paper for Policy Exchange arguing that Britain’s economic model is broken and that the EU’S free movement regime is one reason why.
Bickerton describes Britain as an economy hooked on debt-fuelled consumption, in which the labour market has been hollowed out. A huge, low-productivity, cheap labour force at the bottom works to supply services to the high-productivity, London-centric workers at the top. For the aspirational classes in the middle, social mobility and wages have stalled.
Bickerton argues that businesses, presented with a supply of low-skilled workers from the EU, a scarcity of institutions that represent and help to train that labour, and a centralised state investing mostly in the South, have opted to rely on the sugar-rush of cheap labour rather than investing in training and capital equipment.
The credit system, meanwhile, has been diverted into financial assets and property, pumping up prices while starving businesses of cash. This, combined with the hyper-flexible labour market, eroded investment in training because doing so could not produce a favourable return compared to riding the asset bubble and mobile workers who might just leave anyway. The model worked at first because the wealth effect created by increasing the value of houses outweighed the distributional impact of taking house prices out of reach for most workers. The tax returns this generated for the state were used to buy off those at the bottom via New Labour’s tax credits. But since 2008, the system has broken down and inverted. Tax credits aren’t enough to keep working people out of poverty, home ownership is now going down and it seems wages can never catch up enough to reverse that trend.
Immigration did not cause all of this but, as Bickerton puts it, “EU migration interacted with a long-standing weakness in skill formation and training in the UK”. It might not have shown up in the studies on wage trajectories, but it helped to shift incentives for businesses. Workers at the bottom understood this was not in their interests, no matter how much London economists told them their objections to immigration were racism.
What, then, is the remedy? Reducing low-skilled immigration is one piece of it. But this alone might not be sufficient, since the UK’S lack of vocational training needed to create a high-productivity workforce is a long-standing problem. Bickerton believes Britain needs institutional arrangements that increase workers’ bargaining power and their ability to exchange ideas, pool training and spread productivity improvements.
The problem is that debate on these issues is so polarised. Labour, under Jeremy Corbyn, wants to go back to the sectoral collective bargaining seen at the destructive height of union power. Whereas the Conservatives, because of their experiences in the Seventies, are allergic to any form of worker representation. It’s hard to see how Britain could develop a middle way in such a partisan atmosphere.
It’s also not clear if the reforms Bickerton envisages could work without rules like Germany’s highly restrictive labour market regime. German firms train their workers because they have to – otherwise, the law prohibits them from taking up a huge range of regulated vocations. The UK’S more liberal model makes it easier for newcomers and outsiders to join the workforce, but it fails to protect or promote them once they have a job.
However, the case of the Dundalk car wash should give us hope. Businesses will adapt when their environment changes and there may be much low-hanging fruit, like a lack of basic automation, still to be picked. Even better, and largely thanks to Brexit, we are starting to question the orthodoxies that got us here.