IN FOCUS6-8 min read

3D Reset: labour shortages to drive investment in technology

In an era of ageing and shrinking workforces, companies must invest in and embrace the use of robotics, automation and artificial intelligence.

robot regime shift


Azad Zangana
Senior European Economist and Strategist

The global pandemic underlined the fragility of ageing labour markets in the world’s largest economies. By the end of this decade, the working age population of the world’s largest economies will be shrinking. A diminishing pool of labour is likely to mean companies will have to compete with each other to secure the staff they need. This is expected to drive up the labour share of GDP – the cost of employee compensation as a percent of GDP – and consequently drive down labour productivity, and the profit share for companies.

Companies will have little choice but to respond with investment in technology focused on automation, robotics and artificial intelligence (AI) as they strive to counter rising labour costs by increasing productivity. The promise of a “fourth industrial revolution”, enabled by smart robotics, could have profound implications for productivity and global economic growth. Against the backdrop of high indebtedness and higher inflation further stretching public finances, the benefits offer some relief.

Severe cyclical shortages of workers

Interest rates have risen sharply in the past year to combat very high inflation in the wake of several supply side shocks that have hit the global economy. The pandemic was a key factor in disrupting supply chains and has also contributed to the current imbalance in labour markets.

US unemployment rate

The rise in interest rates should slow demand and domestic inflation pressures in time, but the shortage of workers appears to be more than a cyclical phenomenon. Arguably, unemployment rates were very low even before the pandemic, but the recent falls have been larger, for most countries, than would have been implied by the recovery in GDP. This suggests a more structural fall in unemployment rates.

In the US, the extent of the shortage of workers is underscored by the unemployment to (unfilled) job vacancies ratio (chart 2). The ratio remains below one and close to record lows. This means that even if authorities could match every available unemployed individual with a job in the same location, with the same desired terms and skillsets, there would still be a shortage of workers.

US labour shortages

This is not unique to the US either. Looking at available data for Germany, France, the UK and Japan, we find that their respective unemployment to job vacancy ratios may be higher than that of the US. There is a severe shortage of workers in many developed economies.

Some of the staff shortages can be explained by a growing preference from employees to work fewer hours, which has lowered average hours worked compared to the period before the pandemic. This is forcing companies to hire more individuals to cover the same amount of work, reducing the available pool of labour.

In addition to fewer hours being worked, reduced absolute participation in the labour market has also contributed to shortages. Understandably, the pandemic appears to have made some people reluctant to return to work. This is noticeable amongst older age groups. Moreover, fewer individuals are choosing to work beyond retirement age, and more workers are choosing to retire early.

In the near-term, the reduced availability of staff is driving negotiated wage inflation higher. Companies have been forced to compete with each other to hire the staff they need. Higher average wages, combined with a recovery in jobs growth has pushed up the labour share of national income (GDP), to the detriment to the share for corporate profit.

Populations set to limit growth

Age dependency ratios across most of the large economies are forecast by the World Bank to rise sharply in the medium-to-long term. For companies and investors, a shrinking workforce is a major problem. The vast majority of companies achieve growth in their revenues and profits by expanding their markets. This also requires greater output produced, or services delivered, often requiring a combination of capital, labour and land. Continuing to achieve growth while the workforce is shrinking is very difficult. It effectively means that profits growth will be reliant on productivity growth, rather than simply growth in demand and supply.

Could higher migration be the solution to labour shortages? Indeed, inward migration rates have been falling in recent years , and where there have been spikes in the number of migrants, populist parties have been able to capitalise on xenophobia.

As mentioned earlier, firms are also facing other structural inflationary pressures. The disruption caused by the pandemic to global manufacturing has prompted companies to examine the resilience of their supply chains, and re-consider the lack of diversification. The emergence of a new world order is also testing existing trading ties, with politicians encouraging companies to reshore as much economic activity as possible.

Coping with these pressures and the expected worsening shortages of staff will be the biggest challenge for firms in the new regime. We believe that the only real solution available to firms is to substitute labour with capital. The use of automation, robotics and AI to reduce the reliance on workers is the only way most companies can continue to grow against this challenging backdrop.

Where can AI be useful?

Unlike most robots that are used in the physical production of goods, or the physical delivery of services, AI is far more likely to have an impact on the knowledge economy. A detailed study by Goldman Sachs looking at the degree of automation that can be introduced by tasks in the workforce found that around two-thirds of current workers are exposed to some degree to automation, and around a quarter of current work tasks (not jobs) could be substituted by AI.

Overall, the study suggests that 7% of US employees would be substituted, 63% would be complemented, and 30% would mostly be unaffected. The two sectors that could benefit the most from AI are legal, and the office and admin support sectors, where both could reduce staffing by around a third.

Professions that are least likely to use or be replaced are those with more manual tasks such as building and ground cleaning and maintenance; installation, maintenance and repair; construction and extraction; and production roles.

How much could technology boost productivity growth?

Mckinsey & Co report (June 2023) estimates that generative AI could add US$2.6 trillion - 4.4 trillion annually to the global economy across 63 use cases analysed. It found that labour productivity could rise by between 0.1-0.6% annually through to 2040. However, if generative AI is combined with other technology such as robots, then that could rise to between 0.2- 3.3% annually. Also interestingly, it found that 75% of the monetary benefits are likely to come from four areas: customer operations tasks; marketing and sales; software engineering; and lastly research and development.

As these technologies develop further, so will their useability and adoption rates. But importantly, and as mentioned above in the section discussing robots, the availability of the technology is not enough. The two pre-conditions for adoption are required, being the acceptance by customers, and the adoption being economically advantageous. At this early stage in the development of AI, there is little consideration of the adoption costs for firms, or for wider society.

Growing labour shortages, high indebtedness and higher inflation are likely to exacerbate the pressure on public finances. The promise of a productivity and GDP growth boost could persuade governments that the cost of some displaced workers is a worthwhile trade-off.

Important Information

The contents of this document may not be reproduced or distributed in any manner without prior permission.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.

Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.

This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.


Azad Zangana
Senior European Economist and Strategist


Follow us

Contact Us

Level 33, Two Pacific Place, 88 Queensway, Hong Kong

(852) 2521 1633

Online enquiry: Please complete the web form below and we will reply as soon as possible.

Contact us

The investments mentioned in this website may not be suitable to all investors. The information contained in this website is provided for reference only and does not constitute any investment advice. Investors are advised to seek independent advice before making any investment decision.

Investment involves risk. Past performance is not indicative of future performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Please refer to the relevant offering document including the risk factors.

This website is intended for Hong Kong residents only. Non-Hong Kong residents are responsible for observing all applicable laws and regulations of their relevant jurisdictions before proceeding to access the information contained herein. Schroder Investment Management (Hong Kong) Limited is regulated by the SFC. The website (excluding Schroder Provident Plan related pages) has not been reviewed by the SFC.

The website is issued by Schroder Investment Management (Hong Kong) Limited.

Important notice: Schroders does not make unsolicited requests through emails, calls, messages, WhatsApp, WeChat, Facebook, Instagram applications. Any contact other than via Schroders’ official channels for personal or financial information is likely to be false and fraudulent. Please stay vigilant and refer to our Fraud Alert Notice for further details. If you have doubts about the person, platforms, websites or institutions that claim to be associated with Schroders, please contact us via (852) 2521 1633 and inform the local police.