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Brexit minister David Davis’ sectoral impact assessments - Groningen style

Date:12 December 2017
Bart Los is Professor of the Economics of Technological Progress and Structural Change at the Faculty of Economics and Business, the University of Groningen
Bart Los is Professor of the Economics of Technological Progress and Structural Change at the Faculty of Economics and Business, the University of Groningen

The minister might not have done his homework, but our economists have: and they estimate that 2.5 million jobs and 8.5 percent of the UK’s GDP is at risk from Brexit.

Months ago, in sessions in Parliament, Minister of Exiting the EU David Davis boasted about studies into the likely impacts of Brexit for as many as 58 sectors, with “excruciating detail”. The documents could not be made public, however, for various reasons that lacked credibility. On December 6, Davis suddenly admitted to Members of Parliament that the studies did not exist at all, not even for a single sector.

As long as it is unclear what the future relationship between the UK and the EU will be, it is impossible to come up with meaningful estimates of the impacts of Brexit on output and employment in UK sectors. As David Davis rightfully argued, economists do not have accurate information about how producers and consumers (both in the UK and abroad) will react to the changes. The elasticities that need to be fed into computable general equilibrium models can only be estimated on the basis of historical data, but we have never experienced disintegration of this dramatic type. Still, analyses of good quantitative data about the current economic structure of the UK and the links of its sectors to EU countries might well lead to relevant insights.

We decided to do exactly this. For data, we used our own World Input-Output Database (Timmer et al., 2016), using the most recent figures for 2014. Methods-wise, we adapted an approach introduced in an article by Marcel Timmer, Gaaitzen de Vries and one of us (Los et al., 2016). You can read the policy briefing here.

The data allow us to construct indicators of the effects of Brexit on value added and employment in each of 54 sectors, without having to fix a multitude of parameters regarding behavioral changes. Our most important indicators are the number of 'jobs at risk' and the share of 'value added at risk'. In computing these, we assume that the UK does not export anything to the EU anymore, as in the worst case: a chaotic, no-deal Brexit. This causes contractions at industry level.

Up to 8.5% of the UK's GDP is at risk

This table shows the share of value added at risk in the fifteen industries where these numbers are highest. Of value added in these industries, more than 20% is at risk due to Brexit. Many observers have the impression that Brexit is likely to hit manufacturing industries in particular, because their outputs are traded intensively and would therefore suffer from Brexit-induced barriers to trade. This is reflected in our results, but we also find that a number of services industries might well be hit hard by Brexit. We have established this by our explicitly considering supply chains. Many of the exporting manufacturers rely heavily on all kinds of outsourced business services. Hence, the producers of these services will also suffer from reduced export activity.

For the UK economy as a whole, these services industries are important, as is evident from the relatively high shares in GDP reported in the rightmost column. Our study thus reveals that it is not just the financial services industry in the City that is threatened, although this industry received a lot of attention in the popular press. We estimate that as much as 8.5% of the UK's GDP is exposed to Brexit risks.  

Roughly 2.5 million jobs at risk

This chart focuses on the numbers of jobs at risk. The twenty industries with the highest numbers of jobs at risk are mainly services industries, again highlighting the importance of domestic supply chains. In the administrative and support services industry (which includes renting and leasing activities), almost half a million jobs are at risk. According to our computations, approximately 2.5 million jobs are at risk. This amounts to 8.2% of total employment, which is slightly lower than the share of GDP exposed to Brexit. The workers whose job is at risk are thus a bit more productive than the average British worker, which suggests that the already ailing UK productivity performance might get a setback as a consequence of Brexit.  

David Davis would have served the UK society well by having conducted this type of analysis. We do not claim to have provided a study including "excruciating detail", but have delivered more insights than the UK Government has been willing to provide.

Further reading:

  • Bart Los, Marcel Timmer and Gaaitzen de Vries (2016), “Tracing Value-Added and Double Counting in Gross Exports: Comment”, American Economic Review, vol. 106, pp. 1958-1966;
  • Marcel Timmer, Bart Los, Robert Stehrer and Gaaitzen de Vries (2016), "An Anatomy of the Global Trade Slowdown based on the WIOD 2016 Release", GGDC Research Memorandum 162, University of Groningen.

By Bart Los*, Wen Chen*, Philip McCann** and Raquel Ortega-Argiles***

*University of Groningen, Faculty of Economics and Business and GGDC

**University of Sheffield, Management School

***University of Birmingham, Birmingham Business School and City-REDI

The research underlying this blog is part of a larger project within the British ESRC-sponsored multidisciplinary research initiative “The UK in a Changing Europe”)