On June 23, 2016, the United Kingdom voted in favor of leaving the European Union (EU), a move commonly referred to as Brexit. The day after, Britain’s 15 richest people lost $5.5 billion and the world’s 400 richest people lost $127 billion on paper.
The vote to leave the EU caught the country's leaders, including the prime minister, by surprise. Observers generally viewed it as a mandate by the working and lower-income classes for greater economic opportunity in a country where many perceive a growing gap between the haves and the have-nots. Disgruntled workers and unemployed citizens cited immigration and globalization as contributing to the sluggish economy and rising unemployment. Leaving the EU, it was hoped, would create more opportunity for the local population.
It remains to be seen whether the move out of the EU will help or hinder the British economy. But the vote, nevertheless, exposed a nerve in the social and political conscience of the country. Perhaps more More important than figuring out who actually won or lost in the Brexit vote is understanding why the vote took place at all.
Can Brexit Increase Low Wages?
The EU is a partnership between 28 member countries that began after World War II to reduce the probability of war. It is also an economic partnership that provides a reliable marketplace for goods and labor. Lower prices on goods are welcomed by all, but the increase of immigrants into Britain has caused many to blame the country’s economic hardships on the availability of cheap labor and lower wages.
It remains unclear how Brexit has the ability to raise wages and fix the economy against the headwinds of globalization. Companies are able to find cheap labor by employing innovative telecommute options or moving operations to locations with cheap labor outside of Britain.
The Impact of Income on Brexit
The referendum turned out 71% of the voting population, more than 30 million people. In the end, it was announced that those in favor of leaving the EU won by 52%. England and Wales voted proBrexit, winning 53 and 52% of the vote, respectively. However, not everyone involved in the vote was in favor of Brexit. For example, Scotland and Northern Ireland voted to remain in the EU with 62 and 55% of the vote, respectively. Perhaps a deeper dive into the location of the anti-Brexit voter is key to understanding what's feeding the forces behind Brexit.
London voted overwhelmingly against Brexit. In fact, 28 council areas voted to remain in the EU, while only five voted to leave or exit the EU. Lambeth, Hackney and Haringey had the strongest support to remain at 79, 78 and 76%, respectively. The difference in opinion between London and the rest of England is clear, leaving many to question why London is so different from the rest of the country. The difference could be income, since average median salary in the UK is nearly half that of London.
Rich vs. Poor
George Friedman, geopolitical forecaster and strategist on political affairs, attributed Brexit on the increasing divide between the elites and the growing middle class in the article, "The Surprise at Brexit and the Social Crisis Behind It." Against the backdrop of high unemployment and a stagnant economy, the pro-nationalist rhetoric struck a chord with the growing mob of angry middle class voters. It also struck a chord with those who think bankers and economists are the problem. In other words, Britain is leaving the EU because the proBrexit party was able to cast a wider net for angry voters.
Globalization: An Earnings Strategy
The Chief Executive Officer (CEO) of a company is selected by its board of directors to represent shareholder interests. If the share price goes down significantly, the CEO is fired. As a result, the CEO is primarily concerned with share price. Since share prices are driven by earnings, CEOs have a strong incentive to grow earnings. In other words, many CEOs see globalization as an earnings growth strategy rather than the cause of economic hardship.
Fixing the Economy by Giving Employees More Power
Globalization creates tension between company shareholders looking for increased profitability and the workers of that same company looking for higher wages. The employee may be without a job, but the share price of the stock he owns in the company goes up when he is paid less. This relationship suggests that an employee can increase his wages by increasing his ownership stake in his company, which is an unlikely move. A similar solution involves including employees on the board of directors, thereby connecting wages to earnings growth. Britain could legislate these changes into the corporate bylaws without giving up on the benefits of globalization.
Brexit suggests that the poor have grown as tired of the rich as the rich have of them. While some elites, including Nick Hanauer, argue that higher wages actually increase corporate profitability over time, this view has not gained traction in the business community.