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In sectors where import prices rose because of the drop in sterling, training and wages for workers fell, the paper said. That could have negative long-term implications for productivity, skills and living standards, issues that already plague the U.K., according to authors Rui Costa, Swati Dhingra and Stephen Machin, economists at the Centre for Economic Performance at the London School of Economics.
“A common rationale behind nationalist policies is that putting up protectionist barriers protects domestic production and would undo the economic damage suffered by those who lost out earlier,” the paper said. “This reasoning very clearly does not account for trade no longer being dominated by final demand, nor recognize that the fragmentation of production into global value chains has changed the classic reasoning on protectionism.”
In a “classic setting” of trade in goods, sterling’s depreciation from the 2016 referendum would benefit U.K. exporters and increase demand for domestic workers, the paper said. Instead, it has had a “deskilling impact” on workers in industries that rely on specific foreign sources for their intermediate inputs.
The research helps explain the puzzle of why the drop in the pound didn’t lead to a large boost in exports that some expected in the wake of Britain’s vote to leave the European Union. The Bank of England has previously pointed out that companies could choose to maintain their prices in foreign-currency terms, pocketing any extra pounds generated themselves to boost their profits.
The rise in consumer prices after the referendum also impacted living standards, the report said, with real wage growth essentially flatlining for two years. The effects of sterling’s drop have reinforced and exacerbated pre-existing trends of pay stagnation that have been in motion since the financial crisis. [...]
Paper by the National Bureau of Economic Research (US)