26 August 2021

Will supply shortages choke the economic recovery?

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Brexit is still as polarising as ever. Many Remainers have seized on the ongoing disruption to UK supply chains as proof that ‘Project Fear’ was right after all. At the other extreme, some Leavers have argued that the end of free movement is a ‘good thing’, because it will boost the pay of UK workers. Neither of these two interpretations really stacks up, but there is a sensible middle ground.

For a start, the supply chain problems are global. The rapid recovery in the world economy is already running into capacity constraints, mainly due to Covid. The UK, Eurozone and US are therefore all suffering from similar issues. Indeed, the latest PMI surveys suggest that it is the US, not ‘Brexit Britain’, which is being hit hardest by lengthening delivery times.

The shortages of HGV drivers are global too. The International Road Transport Union (IRU) warned in March that these shortages would ‘soar’ in 2021, in all regions. The pandemic is exacerbating long-standing problems of low pay, poor working conditions, and an ageing labour force. The US and German media are also full of reports of struggles to find drivers.

That said, there are more reports of empty shelves in the UK, and potentially more disruption in the pipeline in the run-up to Christmas, even though claims of widespread ‘food shortages’ are still scaremongering. (Tesco’s boss John Allan is the latest to say that people should not ‘over-dramatise’.)

Brexit is an additional factor which is contributing to the problems in the UK, even if not the main cause. 58% of respondents to a recent poll by the Road Haulage Association (RHA) cited the departure from the EU as a reason for the lack of drivers.

However, 58% of respondents also identified ‘drivers retiring’ as a problem. The RHA notes that the average age of an HGV driver is 55, and that many more than usual have recently quit the industry.

Covid is making this worse. Restrictions on training and driving tests mean that the number of people qualifying as new drivers in the UK fell from its usual level of around 40,000 to just 15,000 last year – a drop of 25,000. This alone explains more than half of the recent increase in the estimated shortfall of drivers from 60,000 to 100,000.

It is surely significant too that the RHA survey was taken in June, before the ‘pingdemic’ forced many more drivers to stop working.

Some EU drivers have left the UK and not returned, but this may be due at least as much to Covid travel restrictions as to new Brexit red tape. The growing shortages of drivers in their home countries also means that some EU drivers may not have chosen to come back anyway, even if Brexit had not happened.

What’s more, almost as many respondents to the RHA survey (53%) also blamed the introduction of new tax rules (known as IR35), which have raised the cost of agency drivers. Unfortunately, ‘IR35 food shortages’ is not quite as catchy as ‘Brexit food shortages’.

The bigger picture is that any impact from Brexit on the supply of workers, including drivers, has been dwarfed by a shortage of labour generally as the economy has rebounded. This is consistent with other replies to the RHA survey: 48% of respondents blamed ‘drivers leaving for other industries’ and 47% identified ‘unsatisfactory pay rates’.

Even the Brexit-related issues are not an inevitable consequence of leaving the EU. The UK government could still add HGV drivers to the skilled workers list, making it easier for them to get visas. The same applies to other sectors where there are labour shortages, such as the poultry industry.

Indeed, it is not obvious why the Government hasn’t acted already. Perhaps it would be too much of a political climbdown to acknowledge that free movement of workers has been good for the UK economy. This is where I think some of my fellow Brexiteers are getting it wrong and, for once, the economist consensus is right.

The best evidence (summarised here by Jonathan Portes) suggests that high levels of immigration from the EU have had little impact on the wages of UK workers. There are many reasons for this, including the fact that the increase in population added to the demand for labour as well as the supply (disproving the ‘lump of labour fallacy’). Migrants also often take jobs that locals don’t want.

It makes sense that this would apply the other way around too. A lack of EU workers might boost wages in some sectors relative to those where there are fewer shortages. But it is unlikely to have much impact on wages in the economy as a whole.

Even if pay does increase across the board, this would be the ‘wrong sort’ of wage inflation. Without any matching gains in productivity, higher nominal wages may simply be reflected in higher prices, leaving real wages unchanged. And if producers cannot pass on cost increases, they are likely to reduce supply instead.

So, will supply shortages choke the economic recovery? This is already happening, to some degree, in many countries. Nonetheless, free-market economies are usually good at adapting to shocks. Changes in relative wages and prices are part of this process.

There are also still some ways that policymakers can help. At the macro level, it does not make a lot of sense to continue pumping even more money into economies that are already at risk of overheating. The problems are on the supply side, not due to a lack of demand.

This point applies to the UK’s furlough scheme too. This is now contributing to labour shortages and risks doing more harm than good.

Instead, the focus should be on removing artificial barriers that make it harder for markets to work properly. These barriers may include overly-dogmatic visa requirements, as well as disproportionate restrictions on driver hours and lorry size. The lack of government tests for new HGV drivers clearly needs addressing too.

In short, the UK is far from alone in facing driver shortages. Supply chains have also been hit by other UK-specific factors that are nothing to with the departure from the EU, including IR35 and the ‘pingdemic’. But this does not mean that Brexit cannot be done better.

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Julian Jessop is an independent economist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.