Access to markets and access to skills are the two areas where London faces particular challenges from Brexit. London’s role in service sector exports means the capital is exposed to different risks than other parts of the UK from leaving the Single Market, and London’s reliance on an EU workforce means that the capital is simply more exposed to any sudden or dramatic curtailing of EU migration.
This chapter looks at what can be done to maintain openness to talent and trade, to enable London to continue its contribution to the UK economy.
Human capital – can London and the UK fill the gap?
As urbanists and commentators have long observed, cities are powered by people: “To thrive, cities must attract smart people and enable them to work collaboratively. There is no such thing as a successful city without human capital.”
The last chapter set out the challenges facing London’s economy in maintaining the supply of skills that drive industries from banking to baking, if Brexit results in restrictions on freedom of movement. Can London or other UK citizens take on the jobs that European workers have filled, through enhanced training or other measures to promote employability? Before examining the options for doing so, it is important to bear in mind that there is not “a lump of labour”, a fixed quantity of jobs that need filling: migrants create new economic activity, and open new businesses, as well as filling specific vacancies.
Unemployment in London is already low: at the end of 2016, 268,000 Londoners (5.6 per cent of economically active people) were unemployed. Though higher than unemployment across the UK (which stood at 4.7 per cent), this was nearly the lowest rate for 25 years. That said, the headline figure masks the lower employment rates for women, young people, those over 50 and those from some minority ethnic backgrounds.
This chapter will argue for continued openness to European workers. Nonetheless, whatever migration regime is put in place in the long term, hiring European workers is unlikely to be as straightforward in future as it has been in recent years, so Brexit enables and requires a renewed focus on ensuring employability for all Londoners. Below we set out what could be done to enhance employability, if childcare and apprenticeship policies were tailored to London’s needs through greater devolution.
Maternal employment and childcare
Mothers of dependent children in London are much less likely to be working, with a 61.4 per cent employment rate, compared to 72.1 per cent in the rest of the UK (rates for men with dependent children on the other hand are very similar in London and the rest of the UK). These lower levels of employment have been identified as a major factor in the high levels of child poverty in the capital. Bringing the maternal employment rate in London up to the same level as the rest of the UK would add more than 100,000 people to the capital’s workforce.
There are many factors affecting maternal employment rates nationally such as parental attitudes, family-friendly work opportunities, work incentives in the social security system and education opportunities. In addition to these factors, childcare is a significant barrier to maternal employment, and particularly so in London, where supported provision does not take account of the longer and more flexible hours that Londoners work, and where high wages, rent and business rates make childcare less affordable, particularly to provide day care or nursery places for children from the most deprived families.
There are many ways to improve access to childcare, including through reforms to the tax and benefits system, which remain the preserve of central government. Nonetheless, the Mayor of London could better shape childcare and early years education in London to meet the capital’s needs – as other Mayors such as New York’s Bill de Blasio have done – if powers and resources currently held in the Department for Education were devolved to London.
In particular, if responsibility for early years education – potentially totalling more than £670 million – was devolved as one of the service areas to be funded by retained business rates, the Mayor and boroughs could choose to spend these resources in new ways, such as expanding part-time childcare provision for children whose parents are returning to work from maternity/parental leave, for which there is currently very limited public funding. The inclusion of early years education in the services to be funded through retained business rates was part of a recent consultation, but the decision was deferred. We recommend that this continue to be considered as a priority.
With new resources and powers, the Mayor could work with London’s boroughs and its businesses to expand and strengthen childcare provision – helping provide new choices and opportunities to London’s families. The Mayor could support and explore more innovative approaches, such as loans and start-up advice for providers, promotion of family-friendly work patterns, and the incorporation of childcare facilities into new developments on GLA and TfL land, or funded by GLA grants.
London has exceptionally high levels of graduates in the workforce, but lags behind the rest of the UK in providing apprenticeships, particularly for young people.
For many young Londoners, apprenticeships also offer poor quality, low-level training; only three per cent of apprenticeship starts in London in 2013/14 were Level 3 Higher Apprenticeships. This reflects the low-level entry qualifications of many recruits, and the concentration of London apprenticeships in low-skilled, low paid sectors and occupations. There is also significant drop out; more than a quarter of apprentices do not finish their training and many apprenticeships fail to lead to secure, decently paid employment.
The introduction of the apprenticeship levy offers an important opportunity to enhance the quality and quantity of apprenticeships. From April 2017, employers whose PAYE wage bill is above £3 million per annum have been required to set aside an ‘apprenticeship levy’ of 0.5 per cent of their payroll, with any unspent sums being passed to HM Treasury after two years.
However, simply entreating London employers to meet the capital’s share of the target runs the risk of generating quantity at the expense of quality. Encouraging greater numbers of employers to take on apprentices could simply result in many re-labelling training schemes as a means of recouping their levy contributions, generating further volumes of low quality apprenticeships from within existing workforces. More active engagement with Small and Medium Entreprises in under-represented sectors, alongside marketing campaigns, could help push up quality as well as quantity. And devolution of the levy, as recommended by the London Finance Commission and endorsed in the Mayor of London’s response to the Brexit White Paper, could enable the Mayor and London employers to work together on bespoke schemes that meet the capital’s needs, and to re-allocate unspent funds within the capital.
Other skills and employability programmes
Beyond these specific opportunities, the principle of further devolution of responsibility for skills and employment programmes has been discussed between successive mayors of London and central government, and a memorandum of understanding published alongside the 2017 Spring Budget committed to further dialogue on post-16 skills and employment support.
These discussions should be prioritised and assume a new urgency, to respond not only to the challenges of Brexit but also to those posed by automation and in particular white-collar automation. Together, these suggest a radical new approach to post-16 education and training is needed in London, where the city could innovate and test out new approaches to meeting its needs.
In the shorter-term, as suggested by the Mayor of London, talks should also take in negotiations on the future of European social and regional development funds, which are set to run until 2020, and the devolution of their successors.
The immigration and work permit system
While taking action to improve Londoners’ skills and to remove barriers to employment is important, it will not quickly or simply substitute for EU migration through taking jobs held by EU workers, or making up for the wider economic impact of curtailed migration.
Immigration will therefore continue to play a crucial role in London’s economy, not only through responding to demand for skills and allowing entrepreneurs to establish businesses in a great world city, but also through the additional economic benefits that immigration brings. In her Lancaster House speech, the Prime Minister said that the UK would continue to welcome immigration, and high-skilled immigration in particular, but that the Government would seek greater control. We discuss below how the current system could help meet London’s needs.
London employers need assurance that they will be able to recruit and retain the workers they need, at all levels of the economy, after Brexit. A first step must be the safeguarding of the position of EEA nationals already living here; the Prime Minister has confirmed that she wishes to do this, but in a way that also secures the position of UK nationals in other EU countries. All parties need this issue resolved as quickly as possible, ideally before the Brexit negotiations begin in earnest; a wholesale and sudden departure of EEA workers from London would be catastrophic.
Before the 2017 general election, the Government gave a clear commitment to end freedom of movement, but to maintain high-skilled immigration. While the election may leave the door open to alternative approaches to restricting freedom of movement, this report works on the basis that a system of work permits would be introduced. Using the current immigration routes available to non-EEA nationals would be the starting point for an overhauled immigration system. The UK’s Point-Based System allows immigration in specific categories (“tiers”), with points awarded according to criteria such as language skills, qualifications and earnings potential, as well as requiring a job offer in the majority of cases. The box below shows the principal tiers.
UK Immigration Tiers
Tier 1 – for entrepreneurs (with money to invest and a credible business idea), investors with more than £2 million, or exceptionally talented artists, academics and scientists. An additional Tier 1 category for graduates seeking work was closed in 2012.
Tier 2 – for intra-company transfers, and workers with a job offer for specified high-skilled roles from a UK company. Jobs must be advertised within the UK first, unless they are in specified sectors with skills shortages (currently including engineers, IT specialists, teachers, medical staff, designers and chefs). A minimum salary is also applied to prevent international recruitment being used to lower wages.
Tier 3 – for low-skilled workers. This tier has not been used.
Tier 4 – for students studying a course at a recognised institution.
Tier 5 – for temporary workers, including religious workers, sports players and artists, diplomatic staff, and young people (17-30 years old) on ‘working tourist’ visas from certain specified countries. With the exception of working tourists, applicants need a job offer to apply.
Tailoring the system
Given the government’s emphasis on the need to maintain high-skilled immigration, we might expect a modified version of Tier 2 immigration to be put in place, with a wider range of specified occupations, and perhaps lower thresholds in terms of earnings.
Such a system might also, as Centre for London, the Corporation of London, London Chamber of Commerce and Industry and others have argued, have a regional dimension, allowing regional work permits that would reflect regional skills shortages, but maintaining a central quota. Australia and Canada are two countries that have regional/provincial powers in relation to immigration, seeking to divert immigrants away from a limited number of urban hotspots. The policy intention may be reversed in the UK, where a regional system would work with the labour market rather than against it, but the principle is the same.
PwC has undertaken research into the feasibility of this approach for the Corporation of London. Under the model it proposes, skills shortages would be assessed regionally, and quotas of visas issued to employers (alongside initiatives to enhance the skills of local people). Visas could be issued for one to six years, depending on the nature of the skills gap, and longer-term visa holders would have the opportunity to apply for UK residency.
This approach would tackle the challenge of filling specialised roles in high value added sectors like finance and business services, where employers would be able to invest the time and money into recruiting overseas, either directly or through a intermediaries such as the Work Permit Sponsorship Body proposed by London Chamber.
But, given the range and extent of London’s skills needs, it is worth thinking about going further. Sectors such as construction, hotels and catering are not used to international recruitment, and smaller employers in particular might be reluctant to take on the paperwork and significant cost of becoming a sponsoring employer. For these sectors, and many others, recruitment takes place locally. The people come to where the jobs are.
One recruitment route, which has been widely adopted by industrial and warehousing sectors, has been the use of employment agencies, some of whom recruit directly in other EU countries. However, many of these agencies have a negative reputation in terms of working conditions, with agency workers paid at lower rates than their directly-employed equivalents, and additional costs for employers in meeting agency fees.
The regulated system of work permits tied to specific jobs, with minimum salaries and specific professional qualifications, also seems badly suited to the young mobile workforce of tech companies. And it misses out on another important aspect of migration between London and other EU cities – the free flow of young people, who travel between cities to learn languages, hone skills and make new friends, supporting themselves through work. These people not only help meet London’s labour needs, but also develop ideas for start-ups, for cultural events, for new social movements – for the rich humus of creativity that supports a city like London. Most entrepreneurs do not come to London with £50,000 in investment funds, as is required for the Tier 1 (Entrepreneur) visa.
A London solution?
We recommend, therefore, a regionally managed immigration system that recognises the unique needs of London’s economy and the unique characteristics of London’s labour market, enabling numbers to be controlled in line with national and regional policy, while retaining as much as possible of the flexibility of the current system. The details of regional schemes would need further discussion, but London’s scheme might include the elements listed in the box below.
City Makers, skills gaps and working tourists: a regional solution
- Regionally defined quotas: London and other regions define their skills needs and to agree work permit quotas with Government.
- One-year ‘City Maker Visas’ would allow European citizens to visit London to look for employment or start-up opportunities, with fast-track work permits for those who are successful.
- The Government should agree reciprocal ‘Young European’ working tourist visas for under-30s, with fast-tracked work permit applications permitted at the end of that period.
- Two-year post-study work permits would enable graduates to stay on in London to contribute to the economy.
- Fast-track London work permits would be issued for EU visitors with job offers or sustainable start-ups, subject to any regional prioritisation, minimum salaries etc.
There are a number of operational details that would need to be addressed. Specific National Insurance numbers could restrict a worker to employment at a workplace within the region in question. This would require revisions to HMRC data collection, and might prove complex to enforce in some cases (for example, where a job specifically entails working at different clients’ premises), but a pragmatic test could be established to determine ‘principal work place’. Some reports have argued that workers should also be restricted to living within the region in question, but we question the need for this; if taxes are being paid, there is no reason for foreign workers to be treated any differently than domestic workers. The current restrictions on claiming benefits would also need to be reviewed, and potentially extended to cover overseas workers who lose work, as well as visitors seeking work.
In some cases, these proposals could be adopted nationwide. Government has already floated the idea of a ‘barista visa’ for young people. The principle is welcome, but the contribution of free movement for young Europeans goes far beyond the froth on a cappuccino. It will be important that any youth mobility scheme does not restrict the occupations that can be undertaken, and allows for longer-term extensions where people have found a longer-term role in London.
Finally, some of these schemes might reasonably be limited to the European Union on the basis of proximity, and ease of return home. Others, including the post-study and youth programmes, might reach wider over time, especially since trade negotiations with other states are likely to include requests for preferential treatment in terms of migration.
Beyond the operational complexity, are such proposals politically feasible, given the results of the EU referendum? For many voters, immigration was the issue that tipped the balance against the EU at the ballot box. Much political debate subsequently has turned on the issue of whether freedom of movement is a ‘price worth paying’ for access to the Single Market, and the Prime Minister’s Lancaster House Speech confirmed that controlling immigration was one of the Government’s twelve negotiating objectives.
London sees it differently, perhaps reflecting the relatively slow growth of London’s European population in recent years, compared to the rest of the UK. In a poll conducted by ComRes for Centre for London in late 2016, only 30 per cent of Londoners prioritised cracking down on immigration, compared to 60 per cent prioritising remaining in the EU Single Market.
 Concern about immigration in London is not negligible, particularly in some of the areas that have seen most rapid change in recent years. But it is far lower than in any other part of the UK: 54 per cent of Londoners were positive about the economic effect of immigration, compared to 28 per cent of people in other regions. What other regions see as a cost, London generally sees as a benefit.
Residents who are nationals from the other EU-27 countries
Source: ONS. Annual Population Survey. Population of the United Kingdom by Country of Birth and Nationality.
Nonetheless, would other regions resent ‘special treatment’ for the capital? This is a risk, but the argument should be clearly stated: a regionally managed migration system would enable London’s economy, which is heavily dependent on migrant labour, to continue to operate as the engine of growth in the UK, without ‘imposing’ immigration on other areas (though other areas might well wish to establish their own systems to meet their own needs). One benefit of a regional approach to migration might be that local and regional leaders would have to start making the case for the economic contribution that migrants can make – for too long the case for migration has been left to a national politicians and business leaders.
Lastly, there is the risk that the relevant government agencies would be unable to cope. Alongside the implicit undesirability of any regional variation, the administrative burden was cited in 2016 by immigration minister Robert Goodwill MP as a reason to reject subnational immigration arrangements: “Applying different immigration rules to different parts of the UK would complicate the immigration system, harming its integrity, and cause difficulties for employers with a presence in more than one part of the UK,” he said. We suspect that several aspects of Brexit will lead to administrative complexity, so this does not seem a reason to reject such proposals out of hand.
Access to markets
London already exports many services that are global in reach, but the principal destination for critical sectors, like legal and business services, remains the EU, with the USA close behind. Growth in Asian markets has been more limited, though the scope for exporting services from the UK is perhaps limited to areas of particular specialisation.
As the last chapter set out, there are specific concerns for some of London’s strongest sectors, and the regulatory regime that will govern their access to the European Single Market following Brexit. Sectors such as financial services are not exclusive to London, but higher value-adding functions are concentrated within the capital, and generate significant tax revenues. Access to sectors such as finance and law is also of huge importance to other EU states, so interests should be aligned to securing a supportive regulatory infrastructure.
Even with such an alignment of interests, complexity, tight timescales and political pressure could conspire to deliver a ‘lose:lose’ outcome. EU negotiators have suggested that a deal needs to be concluded in late 2018, to allow time for ratification before the Article 50 deadline of March 2019. With the French and German elections in 2017, the time available to negotiate a comprehensive free trade agreement that addresses services and regulations, as well as goods and tariffs, is tight. And defaulting to WTO rules would be extremely problematic for London’s service sectors, some of which (e.g. broadcasting and aviation) are not even covered by WTO arrangements, as set out in the last chapter.
Internationally trading businesses need to manage their risks. Without clarity on transitional arrangements, some businesses will anticipate the outcome of Brexit negotiations, seeking to mitigate the risk of leaving the EU without a deal by pre-emptively moving some or all operations into other countries, or at the very least delaying investment decisions. The uncertainty during the negotiation process could become more damaging than its eventual outcome.
So there is a strong case for a transitional deal, and for giving clarity on this as soon as possible. The UK could, for example, re-join the European Free Trade Association (of which we were a founder member), enabling us to remain within the European Economic Area and to participate in most elements of the Single Market in the short term, while leaving the European Union. This would also require temporary continuation of freedom of movement (with the potential for some restrictions on, for example, the length of time jobseekers can stay), though this would give more time to work through the complexities of overhauling the UK immigration system. UK regulations would also need to continue to track the EU’s, albeit through domestic parliamentary and executive processes, rather than through automatic adoption.
In the longer term, it will be essential for London’s Mayor and business leaders to continue to work with the UK Government to ensure that the service sectors that drive London’s growth, and the regulatory regimes that govern them, are not overlooked or marginalised in debates on terms of access to the Single Market. They should also seek urgent clarity on what type of transitional arrangements will be put in place; otherwise the uncertainties attendant on negotiations may lead more and more firms to pre-empt the outcome by moving overseas.
Furthermore, the imminent impact of Brexit strengthens the case made by Centre for London two years ago, for the Mayor to lead the development of an exports plan for London, setting regional targets, tailoring support to London’s needs and leveraging the city’s brand strength, and orchestrating the work of different agencies in London. This could helpfully be accompanied by the devolution of funding from the Department for International Trade.
But maintaining London’s success requires more than openness to talent; outside the EU, London needs to work harder to make the city liveable and attractive for international investors and workers. Other European cities may have the edge in terms of EU membership, so London needs to enhance its own offer. The next chapters identify some ways in which this might be done.
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 With apprentices comprising only 0.8 per cent of its workforce in 2015/2016, London is the region with the lowest proportion of apprenticeships in England (English average is two per cent)
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 Data prior to 2004 from March to February.
 Quoted in Dickie, M., Social Visa schemes for regions rejected, Financial Times, 28 October 2016.
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