As economies across most of the developed world re-open after struggling through seemingly endless months of COVID-19, the revival in labour demand has taken many employers and policymakers by surprise. Even though overall employment in both Canada and the U.S. is still below pre-pandemic levels, businesses are suddenly clamoring for workers and wages in some industries are rising. Job vacancies in the U.S. are hovering at a two-decade high, notwithstanding a frightening fourth wave of COVID infections.
Here in B.C., industries ranging from foodservices, health care, advanced technology, manufacturing and construction are stepping up recruitment efforts. B.C. is unusual in the Canadian context because the aggregate job losses stemming from COVID-19 have been fully recouped, albeit the pattern varies by sector. Employment has yet to fully recover in tourism and many consumer-facing services, whereas jobs in professional and technical services, IT and digital services, health care, and the natural resources sector have increased since early 2020. Still, even industries where business activity is running below pre-COVID benchmarks appear to be in hiring mode.
Much of what’s unfolding in the job market reflects the peculiar effects of the protracted COVID shock, including the impact of generous government income supports, decisions by some people to leave the workforce, other workers deciding to move to different industries or occupations, and surges in labour demand following the relaxation of pandemic-related restrictions. But it’s also possible we are witnessing the early signs of a deeper and more lasting shift, one driven in large part by demographics.
Which brings us to a fascinating 2020 book by two British economists, Charles Goodhart and Manoj Pradhan. Entitled “The Great Demographic Reversal,” it advances a sophisticated and nuanced argument that the forces of demography and globalization, which did much to suppress inflation and interest rates and erode the bargaining power of workers in recent decades, are poised to reverse. A strength of the book is the authors’ determinedly global perspective on topics such as population aging, trends in labour supply and demand, and the balance between global saving and investment.
Goodhart and Pradhan have a view of our macroeconomic future that differs from the assumptions of most economists and financial market analysts before COVID arrived on the scene. Stated briefly, they believe population aging and very slow-growing or shrinking workforces in many economies will lead to:
- higher real wages and enhanced bargaining power for workers, resulting in a rise in labour’s share of national income;
- a sustained resurgence of inflation, driven in part by escalating labour costs;
- higher nominal and real interest rates, beyond the levels now anticipated by financial markets;
- lower worldwide savings as huge numbers of retired households run down savings balances and exert relentless pressure governments to pay for pensions and health care.
The most unorthodox elements of the Goodhart/Pradhan thesis are their predictions that globalization has peaked and will no longer act as a disinflationary force and that economic inequality will gradually diminish as workers gain market power amid widespread labour shortages. They also believe governments and central banks will (quietly) welcome higher inflation, as a way to reduce the real burden posed by today’s mountains of debt.
The authors provide a valuable service by challenging the mainstream narrative in economics and also among central banks on the outlook for inflation in the medium- and longer-term. They claim the models used by central banks and other economic forecasters pay too little attention to demographic factors. Specifically, the models ignore the inflection point that arrives when workforces in Europe, North America, China and several other countries start to shrink, and non-working households come to comprise an ever growing share of the population.
Our main quibble with this well-written and thought-provoking study concerns how technology is shaping the economic landscape and the prospects for inflation on a global scale. The authors discount the ways in which technological innovation is displacing labour and lowering production and intermediation costs. AI, robotics, and the rapid spread of digital platforms, tools and applications garner little mention in the book. In the authors’ framework, technology may matter, but far less so than the structural trends that they choose to examine. If the analysis offered by Goodhart and Pradhan turns out to be wide of the mark, we suspect that their downplaying of the economic impacts of technology will be an important reason why.
As published in Business in Vancouver.