The 3D Reset: demographics

The global pandemic underlined the fragility of labour markets at a time when governments in many major economies had already been running out of options to offset adverse demographics as populations age. By the end of this decade, the working age population of the world’s largest economies combined will likely be shrinking.

The result will be fewer available workers, weighing on growth and exacerbating inflationary trends in the global economy as labour shortages and wage pressures persist.

It will also very likely mean increased investment in technology focussed on automation, robotics and artificial intelligence (AI) as companies strive to offset rising labour costs with improved productivity.

Demographics slowly but surely impacting labour markets

Prior to the pandemic, rising retirement ages had helped offset some of the adverse demographic trends impacting labour markets.

Covid-19, however, tested the willingness of working-age people to continue participating in work, let alone older workers to remain in the workforce for longer.

The sharp drop in participation rates in major economies as the health crisis struck captured the loss of appetite to remain economically active.

Participation rates are now improving, and an expected pick-up in unemployment rates will also create some much needed slack.

But even once price stability is restored – at the probable cost of recession and noticeably higher unemployment rates in some instances – companies are still likely to be facing labour shortages over the medium term. Ageing populations will almost certainly ensure this.

This probably means more inflation than otherwise might have been the case as companies compete to secure staff, pushing wages higher as a result. Supply side solutions to offset adverse demographics – which could include relaxing immigration controls – are limited.

Indeed, any improvement in migration trends has often been hampered by increased political opposition.

The overall result has been less flexible labour markets, which are one aspect of broader, less supportive globalisation trends linked to rising protectionism (see The 3D Reset: deglobalisation).

Azad Zangana, Senior European Economist and Strategist, says:

“The rise of populist politics has meant that populations are less willing to allow migrants to come in and fill roles, so companies are having to think of alternative solutions to the labour shortages.

“The shortage of workers will force companies to begin to make greater use of robotics, automation and AI in order to manage their rising costs, but such actions may only slightly offset the higher inflation pressures coming from the new regime.”

How the new regime may impact the economic outlook, in summary The 3D Reset: how it’s changing the inflation outlook

Could a “fourth industrial revolution” be the answer?

While these trends may all present challenges to companies, the history of technological change offers plenty of hope.

Over the course of the 20th century, technology led to huge productivity improvements that raised living standards for all.

The power of combining robotics and AI to create machines which can operate independently and communicate with each other has been hailed by some as a “fourth industrial revolution”.

This is one reason why “smart robotics” is likely to be a focal point for new investment as AI promises to take automation onto a whole new level. Investors are asking if it could it be the answer to improve productivity and help offset adverse demographics.

For a description on highlighted words see: The 3D Reset: the economic terms you’ll need to know