 |
| Stephen Blackman, RBS Group Economist |
A 30-year explosion in the world’s population of working age people kept a lid on pay growth but began slowing in the 2000s before swinging into reverse in the last couple of years. The diminishing supply of workers may now provide some stickiness in real wages after years of stagnation.
That is welcome given that income inequalities are at their widest level in half a century. A 2011 report from the OECD shows the richest 10 per cent of citizens in the 22-nation club earn nine times more than the poorest 10 per cent, versus seven times in the mid-1980s. And it is not just in low-paid jobs where real wages have stagnated. Many semi-skilled positions in manufacturing and administration have disappeared. These used to be middle-income roles supporting middle-income families.
The revolution in robotics and ICT will continue to reshape the labour market, but wages will no longer be subdued by a double whammy of technological change and workforce expansion. Societies are greying and the proportion of workers in the wider population is shrinking around the world. The median age in advanced economies has risen from 32 in 1980 to around 40 today. It will increase to 46 by 2050. In China the typical man or woman will be 48 by 2050, 13 years older than today’s ‘Mr Average’. Contrast that with the three decades to 2010 when the working age population of East Asia rose more than 50 per cent; a period when women also streamed into the jobs market in unprecedented numbers, figures from the UN and International Labour Organisation show.
This looser brake on wages may hearten workers, but will not be welcome news for the economy given the contribution expanding employment made to global growth in the 1990s and 2000s.
The Japanese and German economies will be worst hit among major developed nations. Their working age populations will actually shrink by more than 30 per cent between now and 2050 according to UN population projections.
Worker numbers in the US, UK and Australia will not fall in absolute terms based on current immigration levels and birth rates, but they will constitute a smaller slice of the population and thus workers will shoulder a greater burden of baby-boomers’ pension and healthcare costs. The proportionately smaller tax base and greater commitments pose serious questions about the long-term viability of welfare programmes such as Medicare in the US.
The only solution to this conundrum is to raise productivity. More of us will have to work, we will have to work smarter and, yes, harder too. This might theoretically ‘solve’ the problem but politically and socially it will pose enormous challenges for governments.
First, migration will not offer a magic bullet. The labour gap in many developed countries is so great that relying on bringing in foreign workers is both politically and socially unfeasible. Extrapolating EU data, we calculate for example that Germany and the UK would need an 20 million new migrants, Spain and Italy 18 million and France 16 million to maintain the proportion of those of working age at 2010 levels.
Second, encouraging more women into the workforce will only help at the margins, given already-high female participation in much of the developed world. Even in rapidly ageing East Asia, female work rates are above the global average.
The most important tool in plugging the labour gap will be raising the retirement age – increasing it by an average seven years in developed economies according to the IMF. Despite a lack of action across much of the developed world (the UK for example has only increased the typical retirement age by one year in the last decade) it has been done elsewhere. Japanese, Koreans and Mexicans typically retire 10 years later than their French or Italian peers.
Investors, as well as governments, must prepare. As the Bank for International Settlements points out, a world with a large and growing middle age cohort has boosted savings rates and the demand for assets favoured by savours as well as housing. In the US, up to two thirds of the movement in PE ratios on the S&P500 can be attributed to baby-boomers shifting investments out of stocks and into bonds to as they prepare to draw their pension, according to a study by the Federal Reserve Bank of San Francisco.
Commercial banks will also need to adapt, taking an inter-generational view of their balance sheets. The demand for mortgages and loans, plus the flow of regular wage deposits will weaken in step with the fall in workers. Simultaneously, customer deposits will be drawn down more quickly as more pensioners withdraw their savings.
It is society however that faces the toughest readjustment. The new demographic settlement will demand more from workers, impose higher taxes and strain public services. Finding an equitable solution that avoids heaping disproportionate pain on either workers or those they support will become one of the big policy challenges of the next decade for governments around the world.
Disclaimer
No representation, warranty, or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained in this document and no member of the RBS Group accepts any obligation to any recipient to update or correct any information contained herein. This document is published for information purposes only and does not constitute an analysis of all potentially material issues. Views expressed herein are not intended to be and should not be viewed as advice or as a recommendation. You should take independent advice in respect of issues that are of concern to you.
This document does not constitute an offer to buy or sell, nor a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that is capable of acceptance to form a contract. The products and services described in this document may be provided by any member of the RBS Group, subject to signing appropriate contractual documentation. No member of the RBS Group shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this communication.
The Royal Bank of Scotland plc (RBS plc) is registered in Scotland No. 90312 with its Registered Office at 36 St Andrew Square, Edinburgh EH2 2YB. It is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Royal Bank of Scotland N.V. (RBS NV) is authorised by De Nederlandsche Bank and is regulated by the Autoriteit Financiele Markten for the conduct of business in The Netherlands. RBS plc is in certain jurisdictions an authorised agent of RBS NV and RBS NV is in certain jurisdictions an authorised agent of RBS plc.
RBS plc or RBS NV is authorised and regulated in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US by the New York Department of Financial Services, the State of Connecticut Department of Banking, the Federal Reserve Bank of Boston and the Board of Governors of the Federal Reserve System. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC member and a subsidiary of The Royal Bank of Scotland Group plc.
Copyright 2013 RBS plc. All rights reserved. The daisy device logo, RBS, and The Royal Bank of Scotland are trade marks of RBS plc and the RBS Group Members. This communication is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without RBS’ prior express consent.