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UNDERSTANDING THE EFFECTS OF BREXIT ON UK PRODUCTIVITY

Published online by Cambridge University Press:  23 January 2025

Stephen Millard ,
Anamaria Nicolae  and
Michael Nower
Stephen Millard*
Affiliation:
National Institute of Economic and Social Research, London, United Kingdom Durham University Business School, Durham, United Kingdom Portsmouth University, Portsmouth, United Kingdom Centre for Macroeconomics, London, United Kingdom
Anamaria Nicolae
Affiliation:
Durham University Business School, Durham, United Kingdom
Michael Nower
Affiliation:
Durham University Business School, Durham, United Kingdom
*
Corresponding author: Stephen Millard; Email: [email protected]
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Abstract

In this article, we use a three-country macroeconomic model of trade, in which we allow for the presence of labour market frictions and heterogeneous firms, to analyse the effects of Brexit on UK productivity. We find that, under the Trade and Cooperation Agreement, UK GDP would have been expected to fall by approximately 7.5% in 2021, that is, as soon as the United Kingdom exited the European Union. Our model suggests that UK GDP would then recover, rising back to a long-run level around 4% below where it would have been had Brexit not happened. This fall in GDP is driven by the negative productivity effects of the implied increase in the costs of trading between the United Kingdom and European Union. Specifically, the increase in trading costs will lead to fewer, higher-productivity, UK firms exporting and reduced competition from EU firms in the UK domestic market allows more ‘low productivity’ firms to remain in the market.

Keywords

BrexitInternational tradeheterogeneous firmsproductivity

JEL classification

E24: Employment • Unemployment • Wages • Intergenerational Income Distribution • Aggregate Human Capital • Aggregate Labor Productivity O40: General F17: Trade Forecasting and Simulation
Type
Research Article
Information
National Institute Economic Review , First View , pp. 1 - 17
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of National Institute Economic Review

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