The potential labour market impact of Brexit

2 August 2016

The overwhelming consensus amongst economists, normally a fractious bunch, is that Brexit is expected to reduce GDP growth with adverse labour market consequences: lower wages and, or higher unemployment, in both the short and longer terms. My focus in this blog is on the short term and specifically this year and next.

Post-Referendum Forecasts

Learning and Work Institute’s initial estimates of the short term economic impact of Brexit were produced for L&W’s Into Work convention on 11-12 July. These suggested that ILO unemployment could be up to 400,000 to 450,000 higher between the end of 2017 and 2020. This was our downside scenario for Brexit. The impact of Brexit is very uncertain for all sorts of reasons and our upside Brexit scenario showed only a small rise in unemployment with the labour market responding to the hit to GDP very largely via lower wage growth.

The Treasury published the July edition of its survey of outside independent forecasters for the UK economy on 20 July. This included 26 new forecasts carried out post the 23 June referendum, and were based on the assumption that the UK will be leaving the EU. Prior to 23 June, forecasts had been made on the assumption of continued UK membership of the EU. At the moment, this survey only covers forecasts for 2016 and 2017. The Treasury only publishes a survey of longer term forecasts every three months and will publish similar information for 2018 – 2020 on 17 August.

The average of our two initial Brexit scenarios is compared against the consensus that emerges from these 26 new Brexit based forecasts below.

Initial L&W Average Estimate of the Impact of Brexit 2016 2017
GDP Growth (annual growth, %) 1.4 0.1
ILO Unemployment, level (000s) (Q4)  1,748  1,862  
ILO Unemployment, rate (Q4) 5.3 5.6
Claimant unemployment, level (Q4) 808 898


July 2016 Consensus Brexit Forecast 2016 2017
GDP Growth (annual growth, %) 1.5 0.5
ILO Unemployment, level (000s) (Q4) 1762 1909
ILO Unemployment, rate (Q4) 5.3 5.7
Claimant unemployment, level (Q4) 770 850
Note: The consensus numbers for the level of ILO unemployment are based on combining the figures for the ILO unemployment rate with the Office for Budget Responsibility’s latest (March 2016) projections of the size of the labour force.

Overall, the average of our initial estimates of the impact of Brexit is quite similar to the current consensus amongst independent forecasters. Neither of these outlooks is very pretty with ILO unemployment expected to be around 220,000 to 260,000 higher by the end of 2017 from current levels. Our analysis is slightly more pessimistic on GDP growth and slightly more optimistic on ILO unemployment than the consensus view. This implies that we have somewhat greater labour market adjustment via wages rather than employment / unemployment than the consensus.  The consensus view is that average earnings growth will be 0.2 and 0.8 percentage points lower as a result of the vote for Brexit in 2016 and 2017 respectively (at 2.3% and 2.4% respectively).

Comparing the pre-referendum June consensus and the Brexit based July consensus forecasts for GDP growth shows that on average independent forecasters have revised down their forecasts for GDP growth in 2016 and 2017 by 0.3 and 1.6 percentage points respectively to 1.5% and 0.5% respectively. The IMF has also recently revised its forecasts for UK GDP growth (not included in the Treasury survey) and they have revised down their numbers for 2016 and 2017 by 0.2 and 0.9 percentage points respectively to 1.7% and 1.3% respectively. The downward growth revisions for 2017 for the both the consensus and the IMF forecasts are dramatic by historical standards.

Post-23 June experience

So much for forecasts – what about what’s actually happened since June 23? Little hard economic data has come out for the period since the EU referendum vote, for example, the GDP numbers which came out on 27 July related to April to June, a period almost entirely before the referendum date. However, some survey evidence has emerged for the post 23 June period.

The Bank of England’s regional agents’ summary of business conditions, published on 20 July, was interpreted by some as showing that the impacts of Brexit have been overdone. In particular, attention was drawn to the findings that: “The majority of firms spoken with did not expect a near-term impact from the referendum result on their capital spending”, and “As yet, there had been few reports of major alterations to businesses’ employment intentions. However, it is important to note that this survey only covered intelligence gathered up to late June and so only covers a very short period after the 23 June referendum result. Hence it is not surprising that: ‘Many firms had only just begun to formulate new business strategies in response to the vote and, for the time being, were seeking to maintain ‘business as usual’’. My conclusion is that business had not reacted because they were still considering how to react. It is notable that: ‘Many contacts planned to undertake strategic reviews of their operations over the coming months in light of the vote’. Some less sanguine findings from this survey were:

  • A number of companies were considering alternative European locations for parts of their business.
  • Around a third of companies expected some negative impact on their investment spending over the next 12 months.
  • Construction companies expected a slowing of output growth over the coming year
  • Brexit was expected to reduce hiring activity over the next year
  • There were some reports of consumers becoming more hesitant about high value purchases, such as durable goods.

It is too early to judge what the impacts of Brexit might be from this survey. The August Bank agents’ survey due out on 10 August will be more useful in this regard.

The latest Purchasing Managers’ Index (PMI) results were published on 22 July. This data was collected between 12 and 21 July, so longer after the referendum than the Bank of England regional agents’ survey, thus giving a longer period for business to react to the result. The results do not make pleasant reading:

  • The PMI Composite (i.e. whole economy) Output Index was at its lowest level in July for over 7 years – since April 2009
  • Composite Output and Composite New Orders (a forward looking indicator) fell by 4.7 and 6.8 points respectively from June to July – these are the largest falls seen in the two series histories
  • The only silver lining is that new export orders rose by its largest amount for nearly two years, largely due to the fall in the £. So depreciation is mitigating to some extent the damage of Brexit.
  • Business expectations of job losses in the coming months. These were not quantified.
  • IHS Markit who publish this survey say the results are consistent with a 0.4% fall in GDP in the third quarter of this year.


Both our own analysis and the post-referendum consensus amongst economic forecasters point to a negative impact of Brexit on the economy and so the labour market. There is only limited survey evidence covering the period since the referendum result, but it does not make happy reading and is consistent with lower economic output and higher unemployment. The projected rise in unemployment between now and the end of 2017 is not inevitable and can be addressed. As we have argued prompt and well-designed welfare to work policies can reduce unemployment, and we urge significant action in this regard to be taken in this year’s Autumn Statement.

Duncan Melville is Chief Economist at Learning and Work Institute