Larry Elliott has a surprisingly neat view of labour demand and supply, and of British capitalism’s ability and willingness to respond to the “real incentive to invest more in new kit” in order to overcome labour shortages and raise productivity (If you want a benefit of Brexit, here it is: British employers must now innovate again, 9 February). He is, of course, right that labour shortages now are not solely the result of Brexit. Covid, chronic underinvestment in training, the self-harm of “austerity” and a decade of wage stagnation all play a part. But, like many other problems, including UK inflation and trade disruption, the shortages are greatly exacerbated by our departure from our nearest, largest, barrier-free market, source of food and materials, access to inward investment and stock of skilled or adaptable workers. We can, obviously, join Larry in hoping that some longed-for explosion in training performance or dramatic end to short-termist inhibition on capital investment in modern manufacturing and services will pull us out of just bumping along the economic bottom. But when the government is bent upon levelling down everything with rigid fiscal and monetary policies, elevation is not to be expected. Seeing a “Brexit silver lining” when growth, investment, trade, labour recruitment (and, consequently, tax revenues to fund public services) are all arrested under the heavy, prolonged cloud cast by the UK’s “hard” exit from the EU gives starry-eyed optimism a bad name. Better to recognise the realities (a precondition of fixing any difficulty) and, as a result, negotiate a sectoral “visas at union rates in exchange for training commitments” arrangement with employers. Plainly, that wouldn’t quickly solve all problems – but it would be a practical start to dealing with disabling shortages. Now, we simply endure stasis. We know that employer demand exists, the need to train UK workers obviously does, and the need for rapid recruitment of labour at livable wages is manifest. Hiring labour on decent pay would allow Larry’s “demand, supply and investment incentive” model to operate. All we need is the catalyst of an active government that is not in thrall to the Brexit obsessives in its party… Oh well, back to the starry-eyed search for a silver lining. Neil Kinnock Labour, House of Lords • Larry Elliott says firms must now invest to boost productivity. If the cost of labour relative to capital increases, then yes, all things being equal, firms will invest relatively more in capital. However, the areas where labour shortages exist are primarily labour-intensive service industries – eg care assistants, nurses, hospitality workers and construction – which are not areas where capital can be easily substituted for labour. In those cases, wages must rise to attract new workers and the services become more expensive, with little impact on output per person. It is true that to boost productivity, we do need investment, but only in those sectors where capital can be substituted for labour. These include the manufacturing and production sectors. In manufacturing, productivity (output per hour) rose by no less than 136% between 1997 and 2019 (pre-pandemic), while in labour-intensive construction, productivity actually fell by 6%. But the problem in manufacturing is not labour shortages. It is demand, prospects for which have been hugely damaged by a combination of the decline in trade following Brexit and the government’s misguided obsession with austerity, although at the moment the surges in food and energy prices are dominating the picture. Firms will not invest if there is no demand. That is the problem that needs to be fixed. Simon Price Professor of finance, Essex Business School