Leaked documents from the UK Home Office, proposing that low-skilled EU migrants would be restricted in the UK’s post-Brexit immigration scheme, may be more likely to increase automation and off-shoring of labour, rather than increase British wages, industry experts have warned.
The document also suggests putting caps on the number of EU workers allowed into particular industries. This has caused widespread concern that the move could expose British businesses to risks such as skills shortage or potentially paying higher salaries for labour.
“If this happens it will drive up costs to the business who had relied on cheaper labour, particularly in things like seasonal agriculture or construction,” says Mark O’Toole, vice president of commodities and treasury solutions at OpenLink.
It also reinforces the need for “businesses to have a totally comprehensive view of their risk and exposure so they can make smart decisions fuelled by all the information they need,” he tells GTNews.
“The potential for increased costs to the business could further bolster adoption of robotics and artificial intelligence to enable manufacturing to do more with less resources”
However, O’Toole takes a more optimistic approach to labour shortages: “If there are labour shortages it may delay growth in some areas. The potential for increased costs to the business could further bolster adoption of robotics and artificial intelligence to enable manufacturing to do more with less resources (something that’s already underway).”
“What I’ve seen from our clients is automation within treasury helping teams do more with less by removing a lot of manual steps and providing better decision making,” he adds.
A new report by Deutsche Bank supports O’Toole’s argument that businesses would rely more heavily on automation. It suggested that leaked restrictions on immigration were likely to lead to increased use of robotics and off-shoring, rather than higher wages for UK workers.
The report states: “Companies faced by higher labour costs would simply offshore production rather than make investments. This would be bad for labour in aggregate, as output and employment would disappear with no compensatory improvement in real wages…The conclusion is that UK companies exposed to foreign competition have limited ability to raise wages in response to a labour supply shock.”
Businesses should “stress test plans and budgets”
EU officials retaliated to the leaked documents by warning that they will block a transitional deal and impose limits on access to the EU single market if the UK implements the document’s proposals, The Times reported.
Many UK businesses employ significant numbers of low-skilled EU workers. This has caused many British businesses and industry leaders to speak out against the plans, including Tim Thomas, head of employment and skills at the manufacturers’ organisation, the EEF, and Ian Wright, director-general of the Food and Drink Federation.
A major concern is the impact this would have on agriculture, construction, manufacturing and service related industries. “The probable impact will be both a rise in the prices of finished goods and a demand for higher pay,” O’Toole tells GTNews.
“To prepare for that, companies should be running analysis around the possible impacts to cost of goods sold and stress testing how this may affect their plans and budgets so they can respond accordingly. These companies should take a harder look at their direct spend costs,” he says.
Many inefficiencies have been embroiled in the process where the purchasing of raw materials and commodities are directly incorporated into the product being manufactured, according to O’Toole.
“It can take weeks between when the spend has occurred and the central reporting of it. This makes it very challenging for companies when it comes to enforcing procurement targets. Without a new approach to direct spend and the impacts to input cost changes, cash flow takes a hit which has a knock-on-effect on earnings per share,” he says.
The director-general of the British Chambers of Commerce, Adam Marshall, argues: “The outcome must include a transition period that is near identical for businesses to now.
“Businesses need to be able to recruit with confidence in that transition period,” he said. Marshall added that “they need to be able to ensure that any individual they take on during that time can stay with the business for the long term.”
Is access to EU workers really a top concern?
Interestingly, a survey released in July 2017 said that having access to EU workers was only a top priority to 18% of UK business leaders.
This was reportedly three times less of a priority than having the right trade arrangements with the EU to ensure a stable trading environment, which was cited by 58% of respondents, the MarketInvoice survey claimed.
Meanwhile, only 7% prioritised the stability of sterling.
Anil Stocker, CEO and co-founder of MarketInvoice, said: “While hiring concerns are relatively stable for business, they need to be focussed on managing their working capital needs in H2 2017.
“The research shows that a third (34%) will forfeit expansion plans, a further third (33%) will forgo launching new products and a fifth (20%) will reduce marketing spend. These are things that will impact the wider economy and could make for tough decisions for business leaders,” he added.
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