When the British public voted to leave the European Union in June of this year, the principle debate waging amongst the Brits, was between the movement of people and free trade. Whilst Britain enjoys the benefits of the free trade with the larger economies on the continent - the likes of Germany and France - many in the UK begrudge the open border policy in Europe which allows large immigration from the smaller economies of Eastern Europe.
It is this issue which has dominated the exit negotiations as the Conservative government seeks to strike a compromise whereby they are allowed access to the single market, or at least the large economies within it, without accepting the open border policy which has seen British services pushed to breaking point. An article in todays Wall Street Journal talks about the negotiations in greater detail: http://www.wsj.com/articles/theresa-may-wants-continued-british-trade-with-eu-post-brexit-1477054148
My argument here is that the movement of people to the UK is probably not a price worth paying for the British economy. The Heckscher-Ohlin model essentially says that countries will export products that use their abundant and cheap factor(s) of production and import products that use the countries' scarce factor(s). An increase in the size of the labour force in Britain due to immigration will make labour a more abundant factor and thus drive down demand and price. Britain currently has one of the highest minimum wages in Europe and the lowest unemployment, they have a service based economy which is the 5th largest in the world. As labour becomes more abundant, the economy will begin to export labour intensive products which may be a step backwards for the British economy.
I find your post very interesting in analyzing the British economy. As you have mentioned that Britain has one of the lowest unemployment rates and highest minimum wages, it can be anticipated that the economy will begin to export labor intensive products and lose jobs. While the Heckscher-Ohlin model does not take into account minimum wages, this seems to be at least one of the causes for the loss of jobs for Britain in the future because of the high wages. As we have learned in class, open borders tend to reallocate wealth to the capital owners from laborers and the increase in supply drives down the wages for labor. However, a minimum wage like Britain puts a clamp on capital owners to keep the jobs in Britain for a short while until they relocate their jobs to other countries because there is no benefit for the capital owners to open borders. It would seem in the short run to keep the minimum wage the same, however in the long run a reduction in the minimum wage will allow Britain to keep their jobs.
ReplyDeleteI agree with Jon, in regards to keeping minimum wage down in the short run and that they will have to raise the minimum wage in the long run. However, how much longer can they keep minimum wages down? Also, like one of our candidates suggested this year, do you think that Europe will start making immigration harder to get across borders?
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