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UK average wage to drop by almost 10% in a ‘No-Deal’ Brexit

The UK average real wage is set to drop by up to 9.6% in the short-run and 5.2% in the long-run in the event of a ‘No-Deal’ Brexit, according to new research from Durham University Business School.

Dr Anamaria Nicolae and Michael Nower developed a macroeconomic model which quantifies the effect of changes in tariffs and non-tariff barriers to trade on UK productivity and other important macroeconomic variables. The research is part of a wider project examining the links between international trade and productivity.

The model provides policy evaluations for a range of scenarios of trade agreements between the UK and both the EU and non-EU countries, including a ‘No-Deal’ Brexit.

Applying this model to a ‘No-Deal’ Brexit scenario, their research shows the potential impact on the UK economy, looking at factors such as average real wage, GDP and labour productivity. The following predictions emerge:

  • UK labour productivity is expected to fall by up to 9.7% in the short run and by up to 5.3% in the long run relative to its level when the new terms of trade are announced,

  • GDP is expected to fall by up to 9.2% in the short run and by up to 5.1% in the long run relative to the level at which it was when the new terms of trade are announced,

  • The total profits of UK firms are predicted to fall below the level at which they will be when the new terms of trade are announced by up to 8% in the short run and up to 4.9% in the long run.

Michael Nower said: “In the event of a ‘No-Deal’ Brexit, the impact on the UK economy in the short-run is likely to be extremely large. In the long-run, the impact of ‘No-Deal’ is much more uncertain, as by leaving the European Union Customs Union and the European Single Market, the UK does regain the ability to sign its own FTAs. However, in the short run, UK trade will definitely be disrupted, meaning there will be a significant decrease in UK productivity and real wages too, as exporting firms will cut their employment, and workers are forced to move into less productive jobs.”

The research also considers the impact a ‘No-Deal’ Brexit would have on the EU, as well as the impact of a number of other trade agreements, including a full free trade agreement (FTA), ‘Chequers’ FTA and unilateral reductions in barriers to UK imports with World Trade Organization rules for UK exporters. The results of the model show only the impact of changes in barriers to trade relative to trend growth rates, and do not consider the impact of any government policy or monetary policy changes as a result of Brexit.

The research highlights that the interdependency between the UK and the EU means that the UK will be significantly negatively affected in the event of a ‘No-Deal’ Brexit, as will the EU.

For further information on this research please visit the Centre for Banking, Institutions and Development’s Brexit Research Project Page.