Membership of the European Union (EU) has direct effects on the UK labour market via the free movement of labour and the contribution of immigration to GDP, the fiscal budget and productivity. It also has indirect effects via the impact of trade flows and foreign direct investment on aggregate economic activity. But the first-order labour market effects of the vote to leave the EU relate to increased uncertainty about future economic and political scenarios. There were clear signals of a hiring freeze shortly after the referendum. In the week afterwards, online job ads fell by nearly a half – from nearly 1.5 million to about 800,000 (according to www.cebglobal.com).
This drop is far outside normal fluctuations in online job ads, which are typically in the range of 5-10%. According to the Confederation of British Industry (CBI), business confidence has fallen to a record low since the peak of the financial crisis in 2009. And the first survey of the UK private sector carried out after the referendum (the Markit/CIPS purchasing managers’ index) showed signs of the sharpest downturn in business activity since 2009, especially in the service sector.
In the medium term, further effects of Brexit on jobs and wages will be determined by the deals negotiated between the UK and other countries on international trade and the movement of labour. The key trade-off being debated is between free trade and control of the free movement of labour, albeit with some nuances in between. If the UK intends to remain a member of the European Economic Area (EEA) and retain access to the single market, it seems it has to accept free movement of labour to and from the EU, as do other countries in the European Free Trade Association.
Only weaker trade relationships, with higher transaction costs, would potentially enable the UK to retain border controls on EU immigration in a way similar to how non-EU immigration is restricted. Most economists would argue that there is not much of a trade-off involved in this choice. The EU is the UK’s largest trade partner (accounting for about half of.