Brexit and businesses: sectoral impact analysis

3. Access to talent

Key findings

• Scottish businesses already face challenges in attracting and retaining talent at all skill and salary levels. This is in part driven by demographics, but also the smaller size and scale of Scottish sectors. According to official data in 2017 there were 18,000 vacancies in Scotland relating to specific skills, and a further 23,000 hard-to-fill vacancies due to general labour shortages.
• A no deal Brexit will bring an end to the free movement of labour between the UK and EU and make these challenges harder for Scottish sectors. It may lead to formal restrictions on the movement of labour, alongside declining perceptions of the UK (including Scotland) as a place to live.
• Most importantly, the impacts of more restricted EU labour movements to Scotland are likely to be disproportionate relative to the UK, due to factors including the scale of market and physical location, and the potential that salary may be used as a proxy for skill levels in a new UK immigration system. Sectors which reported they were most likely to be impacted include food and drink, life sciences, financial services, and creative industries.
• EU migrants make up a notable share of employment in a number of sectors, including in agriculture (where there are around 10,000 seasonal migrant workers engaged in Scottish agriculture), and the life sciences sector (accounting for 17% of the workforce). Retaining non-UK EU national workers is critical to many Scottish businesses.

3.1 Brexit risks

A no deal Brexit will see the end of the free movement of labour between the UK and the EU. This represents a challenge to Scotland given the current and anticipated demographic challenges it faces (see Figure 1). Scotland’s population is ageing more rapidly than the UK’s as a whole, which suggests that the size of the domestic labour force will continue to shrink over time.

Figure 1: Projected change in population by age group, Scotland & UK, 2016-26 & 2016-41

Source: National Records of Scotland, ONS

3.2 Evidence

3.2.1 The importance of EU labour

Scotland’s businesses already face considerable challenges in recruiting and retaining talent across all skill and salary levels. The most recent Scottish Chambers of Commerce Quarterly Economic Indicator (Q2 2018) shows that recruitment difficulties are acting to constrain growth across a variety of sectors^[60] (see Figure 2). According to a survey by French Duncan, 37.5% of Scottish businesses surveyed indicated that they expect recruitment problems because of Brexit^[61].

Figure 2: Balance Scottish firms recruiting staff, encountering difficulty recruiting staff, Q2 2018

Source: Quarterly Economic Indicator Q2 2018, Scottish Chambers of Commerce

It was a theme across a number of the dynamic consultation workshops that having access to a skilled EU workforce makes up for the domestic skills shortage in sectors including food and drink, high value manufacturing, financial services, life sciences and construction.

In the Scottish food and drink sector 12.3% of workers are from non-UK EU countries^[62], which is below the figure of 30% for the UK as a whole^[63]. However, while Scotland may appear less reliant on EU workers than the UK, the sector is proportionately larger in Scotland, and already faces challenges in recruiting workers due to Scotland’s geography and smaller domestic market. The proportion of EU nationals is also higher in specific sub-sectors of food and drink, for example, veterinary medicine, meat and fish processing and fruit picking. The Scotland’s Rural College (SRUC) estimates that there were 9,257 seasonal migrant workers engaged in Scottish agriculture in 2017 with a significant majority engaged in the East Coast soft fruit sector during the summer months. Bulgarian and Romanian workers remain fundamental to the sector, accounting for an estimated 60% of Scotland’s seasonal migrant workforce in 2017, with a further 18% come from Poland^[64]. It can also be challenging to recruit domestic workers into certain jobs, given the length of time it takes to become fully trained, and the underlying attractiveness of the jobs (Insight 7).

Insight 7: EU labour in the Scottish food and drink sector

Scottish meat processors currently have a fifth less staffing than required. According to a trade body, the UK has a shortage of official veterinarians in agriculture who are specialised in large animals, so the needs of the domestic meat industry are not met with the domestic supply of workers. This is corroborated by evidence from the British Veterinary Association^[65]. Evidence from the sector suggests EU labour is more skilled, productive and willing to work at the given wage rates.

Source: EY dynamic consultation

In dynamic consultation, a number of manufacturers felt that they may be less reliant on EU workers than the rest of the UK, but they did identify acute skills gaps in specialist roles in large engineering projects, which are currently filled by EU workers.

A financial services trade body commented that to successfully maintain and develop Scotland’s financial services industry, it needs to attract the best possible talent whatever the country of origin. This is particularly the case when the significant number of EU nationals who enter the sector as graduates from Scotland’s further education institutions are considered.

In life sciences, maintaining the attractiveness of employment to non-UK EU nationals is considered to be crucial, particularly for functions that require very specific skills (e.g. laboratory technicians, and business development employees with language skills who tend to be from the EU27).

In the construction industry dynamic consultation, one large company indicated that there is a current deficit of 59,000 workers. It was also highlighted that it will be very difficult to train workers in some sub-sectors in the short term. It is therefore necessary that there continues to be easy access for workers in key sectors during transition and after Brexit, otherwise this may harm the prospects of these sub-sectors (Insight 8). Skills shortages in England, particularly London, could push up wages for construction workers in England. As a result, this could put upward pressure on construction wages in Scotland to prevent workers from migrating south.

Insight 8: Construction

There is an existing skills shortage in the Scottish construction sector, due to an ageing workforce and the interruption to the training pipeline caused by the sharp fall in construction activity during the 2008/09 financial crisis. While the share of EU workers in the Scottish construction sector is below their overall share in the Scottish workforce, there is a much higher proportion of EU workers in the construction sector in the rest of the UK. Brexit could therefore have an indirect impact on Scottish construction if greater competition for workers increases wage differentials between Scotland and the rest of the UK. This is particularly in the context of the significant engineering projects in England, e.g. Crossrail, HS2, Hinkley Point C and Heathrow.

Source: EY dynamic consultation

In the dynamic consultation for the logistical support sector, a trade association and a business noted the sector’s reliance on EU nationals working in warehousing and as Heavy Goods Vehicle (HGV) drivers. Attendees did note, however, that a decline in non-UK EU HGV drivers is a bigger risk for the UK as a whole as it is more dependent on EU drivers than Scotland. The sector already finds it difficult to recruit and retain workers, and they are now considering how to attract non-EU drivers.

3.2.2 Challenges in attracting EU workers after Brexit

Almost all the sectors covered in dynamic consultation reported a decline in the number of job applications from EU nationals following the referendum vote. For example, in dynamic consultation, one large manufacturer in the food and drink sector noted that it has not been able to run its factories at capacity, even though there is demand for its products, because of labour shortages on the production lines. In response it is considering moving production volumes overseas.

This anecdotal evidence is consistent with the latest official UK migration statistics published by the Office of National Statistics which show that EU net migration has continued to decline from the peak in the year ending June 2016 (+189,000) to +87,000 in the year ending March 2018, its lowest level since 2012.

Scotland may already face disadvantages in attracting workers from abroad because Scotland’s sectors, in general, are smaller than those in the UK. We understand from dynamic consultation that one consideration for migrant workers is the extent to which similar companies in the same sector exist in the event that they seek to change jobs.

In dynamic consultation, food and drink businesses expressed a concern that other parts of the food and drink sector in the UK may absorb migratory labour post-Brexit. For example, less skilled and seasonal migration is a specific concern in the agricultural sector in Scotland. Seasonal pickers often start the season in England and then move north to Scotland through the season, so fewer seasonal workers in England could cut the availability of workers in Scotland.

It was noted across a number of dynamic consultation workshops that high earners in Scotland are subject to marginally higher income tax than they are elsewhere in the UK. Scotland needs to market itself accordingly to be able to attract the best talent as it is clear that some sectors are dependent on these highly skilled workers (see Insight 9).

Insight 9: Life sciences

Attracting non-UK EU nationals is a high priority for Scottish life sciences companies. Scotland competes with Cambridge and London to attract top employees. It is challenging to attract labour to Scotland because the sector in aggregate is smaller, and hence there are fewer job opportunities. This sector is dependent on EU staff as skills are very specific (e.g. laboratory staff) and the pool of workers in the UK is too small. Business development staff tend to be from the EU because of their language skills. In some firms EU staff could be up to 50% of the workforce, but technical and factory staff are likely to be Scottish.

Source: EY dynamic consultation

There may also be challenges for earners on the other end of the earnings spectrum. While the UKG has indicated that they will continue skilled immigration after Brexit, there are concerns that the UKG may have income requirements akin to the current Tier 2 visa salary minimum, which may be too high in many key Scottish industries and especially for growing small to medium enterprises, e.g. games sub-sector companies and start-ups. These arrangements will be expensive and could put Scottish games companies at a competitive disadvantage compared to the rest of the UK (where there are larger labour markets) and the rest of Europe. Another example identified by the SG is the construction sector. Data from the ONS Annual Survey of Hours and Earning (ASHE) from 2017 shows that the median wage in the construction sector was under £30,000, so if the income requirement is too high it could create significant challenges for plugging the construction skills gap.

3.2.3 Implications for productivity

Limitations on the ability to recruit non-UK EU nationals will have a significant impact on the productive capacity of a number of key sectors. While having access to the right workers now is important, making sure there is a potential flow of future workers is critical for the growth potential of Scottish sectors. This may also be a determinant of the ability to attract FDI, as evidenced by results from EY’s Attractiveness Survey programme which shows that gaps in skills availability were raised as a significant worry for investors^[66].

In the long term, investments in increased automation may mitigate some of the impacts, but a number of businesses noted that automation requires significant capital expenditure, and additionally, has significant lead times. For example, representatives from the Scottish fishing sector have travelled to Iceland to visit a manufacturer of machinery that automates elements of fish processing. However, they noted the significant capital outlay required, and the 3-year lead time on the equipment as barriers to rapid adoption. There could be a role for Government in supporting capital investment for automation.

A number of companies consulted mentioned their reliance on the use of EU workers for temporary projects (Insight 10).

Insight 10: Chemicals

The workforce in the Scottish chemicals sector is largely indigenous, but for capital projects, or for annual servicing or upgrades, a number of companies highlighted that they call on specialists from the EU. Without access to non-UK EU workers there is potential for degrading capacity and competitiveness of the sector in Scotland.

Source: EY dynamic consultation

In the creative sector, a concern for festivals organisers is the bureaucracy associated with short-term visas for artists. If a process is required for EU27 citizens to be able to come to the UK in future to perform at festivals, this will be time consuming and costly. Crucially it also might lead to unwillingness of groups to include Scotland on European tours because of the additional burden. While some of Scotland’s major festivals, including the Edinburgh International Festival, the Edinburgh International Festival Fringe and the Edinburgh International Book Festival currently have “permit free festival” status, most festivals and arts organisations do not, and this could be a real issue for them.

3.2.4 Opportunities for Scottish workers

Scottish workers have also benefitted from free movement, enabling them to gain experience overseas, to base themselves in Scotland and take advantage of wider opportunities. This advantage was seen as being particularly important for workers in Scotland in the creative industries who may not be able to sustain livelihoods in the sector were it not for these international opportunities (Insight 11).

Insight 11: Creative industries

A characteristic of the sector is that there is a high level of contract and portfolio working for many different professions like musicians, artists and freelance TV producers. Currently these workers can live in Scotland and work all across Europe. If they cannot move freely to the EU after Brexit, then there may not be enough work to sustain them in Scotland. Scotland may well then lose workers to London (or other UK metropolitan regions) where there is enough activity to sustain workers completely without EU travel. Scotland could seek to promote itself to attract these workers.

Source: EY dynamic consultation

According to a report for the Scottish Contemporary Art Network, the Federation of Scottish Theatre and partners, just under half of the 341 respondents in this sector had worked abroad. Analysis showed that of those who had travelled for work, most said that they visit the EU (outside the UK) for between 1 and 7 days per year (30%). However, a substantial proportion visit the EU for either 15-30 days (25%) or 31+ days (21%). Findings from this survey also indicated that more than a quarter (26%) of all respondents plan to, or were considering, leaving Scotland/the UK after Brexit, rising to 57% of (other) EU nationals and 36% of nationals from outside the EU^[67].

3.3 Implications and policy response

Skills shortages in construction^[68], high value manufacturing and financial services in Scotland^[69] mean that continued access to EU nationals is a necessity both to maintain current levels of activity and to ensure the future productive capacity of some sectors through maintenance and the ability to attract FDI^[70]. The end of free movement as a result of Brexit may reduce the attractiveness of the UK and Scotland as a place to live and work for EU nationals, particularly if there is a change in the working or residency rights.

There remains uncertainty regarding visas for UK citizens working in the EU27 post-Brexit and vice versa. The UK has committed to respecting the rights of EU citizens currently in the UK, while the EU has indicated that policy regarding UK nationals will be the responsibility of individual member states. SG recently announced that Scotland's Citizens Advice network will provide a new advice service to European citizens in Scotland affected by changes in the immigration rules as a result of Brexit^[71].

Therefore, given the current shortage of domestic workers with the requisite skills for the sectors surveyed in dynamic consultation, it is important that Scotland provides the right education and training to ensure a future supply of skilled domestic workers. There is also an opportunity for businesses to adopt broader recruitment practices to employ UK workers at a disadvantage in the labour market to substitute for any loss of EU migrants. For example, these could include women, older workers, younger workers, ethnic minorities and people with disabilities. Scottish Enterprise has sought to retrain 2,000 staff from a major retail bank so they can work in the digital sector, and they are also working with a technology company, scoping the potential to encourage more female workers, for example in retail, to follow the same path. SG and Scottish Enterprise should continue identifying and investigating opportunities like these.

Investing in education, especially at the university and further education level, could also mean that international students, including from the EU, will continue to come to Scotland and may continue to work in the country after graduating^[72]. If Brexit is a disincentive for top academics in research coming to Scottish Universities, due to a potential decline in research funding, this could have knock on consequences for attracting EU students, a potential source of labour in Scotland^[73].

3.3.1 Initiate business and policy action to address workforce/talent issues

• SG should continue to push for a migration policy that meets the needs of Scottish business – e.g., continuation of free movement, minimal barriers to hiring EU workers, and exemptions (under the Shortage Occupation List) for specific Scottish sectors and occupations where there are skills gaps and labour shortages.
• Scottish businesses need to review their recruitment and retention plans in the context of the loss of free movement. In particular, they should put in place retention plans for key EU talent, and also explore alternative sources of talent from under-represented segments of the community (e.g. women, older workers, younger workers, ethnic minorities and people with disabilities).