Abstract
We examine the distributional consequences of post‐Brexit trade barriers on wages in the UK. We quantify changes in trade costs across industries, accounting for input–output links across domestic industries and global value chains. We allow for demand substitution by firms and consumers, and worker reallocation across industries. We document the impact at the individual and household level. Blue‐collar workers are the most exposed to negative consequences of higher trade costs, because they are more likely to be employed in industries that face increases in trade costs, and are less likely to have good alternative employment opportunities available in their local labour markets. Overall, new trade costs have a regressive impact, with lower‐paid workers facing higher exposure than higher‐paid workers once we account for the exposure of other household members.
Highlights
On June 23rd 2016 the UK voted to leave the European Union after over 40 years of membership
The variation we find in exposure across different Travel to Work Areas (TTWAs) and occupations suggests that workers’ location and mobility, as well as their industry, are likely to be important when considering how to mitigate any adverse consequences of any changes in the UK’s future trade policy
We found that individual’s exposure and the exposure of their households can be quite different, at the bottom of the individual earnings distribution. This highlights the importance of considering household rather than just individual circumstances when providing workers with compensation or assistance in coping with future trade shocks
Summary
On June 23rd 2016 the UK voted to leave the European Union after over 40 years of membership. Workers in occupations and localities where the demand for their skills is very concentrated will have fewer outside options, and so be more hard hit This suggests that the degree of labour mobility across regions, industries and occupations will be key determinants of the distributional impacts of Brexit. By considering the potential role of intra-household insurance, our analysis reflects the fact that spousal labour supply has been identified as an important insurance mechanism (Blundell et al (2016)), that has so far been neglected in the trade literature All these factors have potentially important implications for evaluating the impact of changes in trade barriers on both inter-personal and inter-regional inequality and are important to incorporate in any distributional analysis. Online Appendices give further details: Appendix A discusses data sources; Appendix B discusses our assumptions on tariffs in a hard Brexit scenario; Appendix C discusses model derivations and results; Appendix D reports how we allocated estimates of non-tariff barriers and elasticity estimates across sectors; Appendix E reports industry level changes in value-added in our model; Appendix F provides additional analysis; Appendix G discusses the sensitivity of our results to different assumptions on key parameters and non-tariff barriers; Appendix H discusses the potential for reductions in EU immigration post-Brexit to mitigate distributional impacts
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