Discover more from Monday Morning Economist
When pandemics meet politics
Shortly before the start of the pandemic, the United Kingdom began the process of withdrawing from the European Union. Brexit is making the pandemic-induced supply chain issues worse.
This is yet another newsletter about shortages, but the cause of this headache will be slightly different than what we’ve seen in the past. The pandemic is still causing a bullwhip effect in industries across the world, but a certain pre-Covid event is making it worse for one particular country. In January of 2020, just a few short months before the world starting shutting down, the United Kingdom officially began the process of withdrawing from the European Union. The British Exit (aka Brexit) is making it harder for some major companies to get the supplies they need, especially food.
Across the United Kingdom, truck drivers have left to go back to their home country, which has left the industry critically short-staffed. This has had major ripple effects in various food-related industries like grocery stores and restaurants. Last week, some 1,300 McDonald’s locations across the United Kingdom officially ran out of milkshakes and bottled water. KFC issued an ominous warning that some menu items may be unavailable and that their iconic packaging may look a little different. Nando’s, another chicken fast-food company, is facing a chicken shortage of their own as well:
On the face of it, hearing about shortages in the fast-food industry or at local grocery stores likely isn’t all that surprising to those of us in the United States. A lot of the supply chain issues around the world are the result of a sudden increase in demand as people come back from lockdown coupled with a slow down on the processing side because of COVID restrictions. In the United Kingdom, these issues have been compounded because of Brexit. Roughly 1.3 million non-UK workers left the country during the pandemic. That’s nearly 4% of their entire workforce.
The European Union was founded in the early 1990s as an economic and political union that established a unified system of laws among member states to ensure the free movement of people, capital, and goods/services. The monetary union would be established at the end of the decade and implemented in the early 2000s. The concept was so unprecedented that it would eventually be awarded the Nobel Peace Prize in 2012. Despite the eventual power that came from being a Eurozone member, the European Union was not universally loved. In 2016, the majority of UK voters voted in favor of leaving.
Immigration is often a contentious topic among the public, but it’s less so among economists. While George Borjas famously attributes this to researchers protecting the “ideological narrative,” economists almost universally support more open borders. Back in 2016, IGM Forum posed two questions to a panel of US and European economic experts on the effects of migration to western Europe. 90% of the respondents agreed that the “freer movement of people to live and work across borders within Europe has made the average western European citizen better off since the 1980s.” The other 10% were either uncertain, had no opinion, or did not answer the question. No one disagreed.
Where they differed was on the question of whether freer movement of people made “low-skilled” western European citizens worse off in that same time span. While only about a quarter of respondents agreed with this sentiment, the results were not as strong as they were on the initial question. Part of the reason for that dissension likely comes from the focus on western Europeans rather than Europeans as a whole. European migration tends to flow west and north as low-wage workers seek higher wages in some of the richest economies in the world.
Free migration, whether it’s people, goods, or capital, allows economies to achieve allocative efficiency. This means that the resources themselves “find their way” to where they are most valuable. As allocative efficiency improves in a country, the country produces more and more stuff, and incomes increase along the way. This is the story associated with the question that the respondents overwhelmingly agreed with. This process empirically works, but the issue, both publicly and among the economists, comes with how the distribution of those gains is allocated. Allocative efficiency increases the entire size of the economic pie, but it doesn’t mean everyone gets a bigger slice.
As new workers come in, there may be some competition among previous workers who occupied similar jobs. For jobs that require secondary degrees or university degrees, this isn’t as likely to be an issue. The workers that are most impacted by immigration are the ones that can least afford to take a hit to their incomes: high school dropouts. Even if these workers were simply unharmed during migration, when everyone else’s income increases, they’re still relatively poorer. This is part of the reason for the political turmoil in the United Kingdom regarding Brexit, but also why economists weren’t able to reach a consensus on the second question.
So how is Brexit impacting supply chains today? The European Union was intended to ease immigration restrictions between countries so that workers could more easily work anywhere in Europe. Once the United Kingdom decided to leave the European Union, those immigrants needed to find their way to a new European Union member or begin the process of applying for work visas. Nearly 6 million EU citizens applied to settle in the post-Brexit UK. Despite the number of people choosing to stay, Brexit has caused a massive outflow of workers away from British shops, factories, and from behind trucks, but no one coming to replace them; the exact opposite of allocative efficiency.
As the UK opens back up, demand for products is significantly higher than what companies were ready for. It takes time to start the manufacturing process and to get the process back to “full speed.” A slowed increase in demand likely wouldn’t cause such a headache. A sudden increase can’t be met because the UK doesn’t have enough workers ready to fill those spots, some of that is caused by the pandemic, but it’s made worse by the fact that a million immigrant workers have left since Brexit. It’s too late to undo the referendum, and the UK will likely stay independent for the foreseeable future. Unless a much more relaxed immigration policy is in place soon, the supply chain issues are likely to last much longer than the pandemic policies.
There were an estimated 34,738,347 people in the United Kingdom’s labor force in 2020 [World Bank]
The United Kingdom is short 100,000 lorry drivers of their 600,000 that worked before the pandemic [BBC]
There were a total of 17,410,742 votes in support of the United Kingdom leaving the European Union [BBC]
Based on data from 2016, more than 271 million people crossed the UK border by air, almost 22 million crossed the border by sea, and close to 21 million left or arrived by train [National Audit Office]
Week 34 is over, and I can officially announce that I hit my yearly target of 52 books 🎉🎉🎉! I finished up a book I was reading on minor league baseball stadiums in the northeast and I also checked in a shorter book by Dino Comics that came in the mail earlier this week. I’m in the middle of a few other ones and I hope to finish them soon!
If you’d like to read more on the economics of immigration, I recommend The New Geography of Jobs by Enrico Moretti. The book looks at a variety of other topics but has a nice section on immigration. Alex Nowratesh also put together a fun little booklet called The Most Common Arguments Against Immigration and Why They’re Wrong and you can always read George Borjas’s book We Wanted Workers to get a different perspective.