Free DP Download 07 August 2020 - Potential Consequences of Post-Brexit Trade Barriers for Earnings Inequality in the UK

Thursday, August 6, 2020

Rachel Griffith, Peter Levell, Agnes Norris Keiller    
CEPR DP No. 15126 | July 2020

Post-Brexit trade barriers are likely to impact wages and earnings inequality in the United Kingdom. Blue-collar workers are the most exposed to negative consequences of higher trade costs caused by Brexit, because they are more likely to be employed in industries that face increases in trade costs, and are less likely to have good alternative employment opportunities available in their local labour markets. Overall new trade costs have a regressive impact with lower-paid workers facing higher exposure than higher-paid workers. 

These are among the main findings of a new CEPR study by Rachel Griffith and colleagues, which examines the distributional consequences of post-Brexit trade barriers on wages in the United Kingdom, at the individual and household level. The study focuses on changes in trade barriers associated with a hard ‘WTO rules’ Brexit, as this is the default outcome in the event the UK and EU fail to strike an agreement. Among the findings: 

  • Brexit is likely to lead to increases in the costs of trade between the UK and the EU, which is by far the UK's largest trading partner.
  • Industries that are most exposed to new trade costs are clothing and textiles, chemicals, transport equipment and food and drink manufacturers. 
  • These industries are disproportionately likely to employ workers in blue-collar occupations (machine operatives and those in skilled trades).
  • Exposure is highest among older, less educated and male workers.
  • Women are more likely to be employed in non-traded industries that are less exposed to new trade costs.
  • Exposure is also greatest for workers in the middle of the individual earnings distribution, where workers in blue-collar occupations are concentrated.
  • Workers in some high earning occupations (such as managers, professionals and technical workers) are also often employed in highly exposed industries, but these workers typically have better outside options (alternative job opportunities in less exposed industries in their locality).
  • While low earning workers may not themselves be exposed to the increase in trade barriers, they may be indirectly affected through impacts on their partners and thus on household income.
  • Workers in occupations and localities where the demand for their skills is very concentrated will have fewer outside options, and so be more hard hit.
  • The degree of labour mobility across regions, industries and occupations will be key determinants of the distributional impacts of Brexit. The mobility of less educated workers across both regions and sectors in response to trade shocks tends to be low. 

Workers' location and mobility, as well as their industry, are likely to be important when considering how to mitigate any adverse consequences of any changes in the UK's future trade policy. These results could justify ‘place-based’ policies that target assistance at adversely affected regions.

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