Why The Global Labor Market Is Shrinking

This will shape things in ways that might be surprising. For instance, the state will become more, not less active, as voters demand the shift be managed, and watch out for conflict between those who have invested in this new era and those disenfranchised. Welcome to Benjamin, a show about the global economy. I'm Daniel Moss, columnist of Bloomberg Opinion in New York, and I'm Scott Lanman and economics editor

with Bloomberg News in Washington. Our guest this week is Andrew Twiddel, a partner at Bain and Company in New York, peace chair of their Macro Trends Group, and co author of the report Labor The Collision of the Demographics automation and inequality. Andrew, Welcome to Benchmark. Thanks for having me down, Scott. Happy to be here, Andrew, no one can accuse you of thinking small. So do you just ignore the employment report that's published the first frauday of every month. Well,

we're not. We're not quite glued to the to the radio or to the TV to watch it. But we do pay attention obviously to what happens in the nearer term, but we try to put it in context of bigger, longer term trends that really affect our clients, corporations and investors planning and investment horizons. And in every monthly number there are gems of these long term trends. Absolutely we see things playing through and and the story gets clearer and clearer over time, but we think it will still

take a few years to play out. Andrew, I just have to take a step back for a second before we get into the nitty gritty. I've read a number of these consulting firms reports throughout my career on big macro trends. They really tend to be pretty dryly written, bland in their views, pretty safe in their conclusions, and that is just not the case with this report that

you guys put out, it's it's actually pretty provocative. I'm wondering did you set out to do that or was this just kind of where you ended up after doing a thorough analysis of all the data and predictions that you were thinking about. Well, thanks, thanks for the comment. First of all, we um you know, I don't think we try to set out to be provocative per se, but we do always ask ourselves when we see conventional wisdom coalescing in one direction, where could that be wrong?

And so I think in all of our reports, whether it's Labor twenty thirty or um a World of Washing Money which was our look at capital Superabundant several years ago, and spatial economics, we try to take a little bit of a perspective of where could people be wrong and where there are some things that are surprising and maybe counterintuitive to talk about it's a great transformation, sounds profound, but just to be clear, we're talking about trends already

observable that are going to accelerate. Yes, yep, this is not something that's out there in the future. It's happening now and it will accelerate. In this case, really We use that phrase to describe the period between now and roughly so think of this as the next ten to fifteen years and kind of a turbulent time, especially in the twenties. But it's it's all stuff that has started already and will accelerate. And when you say twenties, you twenties,

not the Roaring twenties. We're here, well, you know, maybe maybe echoes of that, the turbulent twenties. Let's say, can you just go over what what the main conclusions are for our listeners who probably haven't sure, so if I can try to boil it down, I'd say we are coming from a period that you know, many people have called the Great Moderation. If you think about the last forty fifty years, there were a lot of really positive

developments for business, for investors. There's a lot of global growth, increasing globalization, and macro was calmed. You know, that was the environment most of us grew up in and learned to navigate in. And that period clearly ended in two thousand eight, and we've had this kind of choppy transition time, I would say, over the last ten years or so, and so now we're entering this phase we call the Great Transformation, and you know, there are several things that

are happening there. One is we're shifting to this new world of labor scarcity driven by demographics, and that's you know the reference you made at the start of the program. That's gonna have big implications for the workforce. We're really seeing automation increase uh and and that's going to reshape the economy and profound ways. We're seeing an end to this period really of capital superabundance and probably a reset so higher interest rates over time, and we're seeing the

decline in this globalization era. That's a cyclical pattern, by the way, this happens throughout history, and now we're entering one of those cycles where there is a retreat from globalization into what we're calling kind of a post globalization area area era, which will have more volatility, more geopolitical volatility,

macroeconomic volatility. And so we can get into all of these trends, but they're going to really shift the way we think about running our companies and where we invest, and the role of the state with respect to corporate the corporate sector. What's this big capital spending an investment boom that you full see were used to hearing about how capital spending has underperformed and there's not enough investment in plant and machinery. How do you square that right?

You can see the productivity everywhere except in the statistics, right. So I think the capital spend boom is going to be in response to this labor shortage. So as the price of the workforce goes up, there will be more incentive for businesses to spend and automate, and the automation will become more capable, particularly in the service sector. So there's been a lot of automation for many years in the manufacturing sector. That's a small part of the economy today,

certainly from an employment standpoint. And as service sector robotics really takes off in terms of capability, the cost of developing those robots and cobots falls and the cost of labor goes up, it will lead do you know, large incentives for companies to automate in a significant way. Andrew, you're you're kind of playing right into some of our favorite topics here on Benchmark. Dan and I have spent a lot of time talking about demographics, automation, and Japan

as well. And you know, this kind of strikes me that a lot of these trends that you're talking about are already underway in Japan. Did that strike you as all at all as you were putting together this report? Absolutely, Japan was, you know, the most demographically far down the curve market in the world, and you've seen it for many, many years in Japan, as you say, And it's not limited to the US and Japan, this is going to be all over Western Europe. It's even gonna be in China. Right.

People like to talk a lot about China getting rich before they get or getting old before they get rich, and I think that's true U And even in China in companies that have had a labor cost advantage, there's a big pushed automation. Fox con the electronics manufacturer going to be putting in a million robots by so huge investments to be able to figure out how to deploy this technology. And just to come back to your point

about what where's the productivity growth? Historically, when you see major advances in technology, it does take a few years before management teams really figure out how to take advantage of it and get those improvements in productivity. So we do see it coming really and especially in the next five to seven years. Let's say, you know, I'm glad you mentioned China. That might strike many of our general

listeners as pretty strange. There has been an idea that's been prevalent in the West for a long period of time that China is this vast pool of sweatshop labor. Now you mentioned fox Con. Let's talk a little bit about that company and it's iconic role in China's industrialization and what you think it's doing with robots is so important. Well, it's it's just part of the toolkit to continue to be cost competitive and to have a place at the center of global supply chains. You can't rely forever on

a low cost uh you know, wage model. That's not what the Chinese government wants to do. That's not going to promote social stability in China. So they're trying to innovate number one, and all the China made in initiatives are partly about how do you add more value and they're trying to maintain a cost advantage, and automation is clearly going to have to be a big part of that. So this iPhone I've just taken out of my pocket

purchased on Montague Street in Brooklyn. Fox Con had a key role in this fund didn't talk about that well. It had a key role, particularly in the production and assembly of the phone. It didn't really have a lot of the I P around the software, the customer experience, and so that's a point that sometimes lost in the global trade debate as well. But China understands this. China wants to be able to add more of the value

in the content, the intellectual property. And to your point about is it just a series of you know, large

pools of labor, low cost labor. Some of the most cutting edge new economy companies in the world are in China, and I'm thinking not just of of manufacturers like fox Con, but certainly the technology companies Ali Baba, ten Cent, b I do UH, financial services companies paying on the Global Insurance Company and Financial which was started by Ali Baba and is now would be the eighth largest bank in the US if it were a standalone bank. Um Higher which is an impliance company and they bought g S

appliance business. That's not really a new economy company, but they have one of the most cutting edge approaches to organization and leadership in the world. So you've got this very robust corporate sector in at least the private part of the market there that is innovating at the same time as as people maybe still think of them as just a source of low cost labor. Andrew, let me

shift gears to another important conclusion in your report. You say that over the long term there's going to be an expansion in the role of government as a result of all these changes. You see the upper class and and lower class kind of replacing what's now upper class, middle class and lower class. Automation really making high skilled jobs in high demand, and yet there's going to be an even further hollowing out of of lower paid jobs.

Basically that's going to you know, really force some big questions on society, you know, as all this as the

aging demographics happen. My question is we're recording this in a week where the US midterm election looms over everything, and yet you know, over the long term, you know, you make these conclusions that seem like they're you know, you're going to have an expansion of the government's role regardless of you know, whatever the short term political impact is in the US or anywhere else how how did you arrive at this particular conclusion about the role of government.

It's a it's a great question, and I'm glad you asked that, because I want to make it clear we're not trying to make a commentary on short term political wins. But the broad story we see here is, you know, you've got labor scarcity leading to a rise in labor costs and wage growth, all else equal, that would reduce

inequality and probably help with some of the political stability. However, just as that's really taking hold, you've got this huge wave of automation that's going to be coming that will outright this place probably of the jobs in the country, and it will put downward wage pressure on another. Let's say, the people who will really benefit the most from and can take advantage of the automation are the best educated,

highly paid people today. And so we enter this period with historically high levels of inequality, and all of these trends, you know, we haven't even talked about life cycle and better health, where the outcomes are also very skewed and unequal, will reinforce the pressure on equality or inequality um and so you know, given that trend, I guess. The final point I would say is this transition will happen very very fast by historic standards. So waves of automation and

new technology are nothing new. But if you look at previous shifts, you know, you can go back and look at the movement from the farm to the factory a hundred years ago. You could look at the shift from a manufacturing economy to a service economy. We took one other example, which is a more recent and narrow one, but a sharp correction, which was the impact on the

construction sector in the wake of the housing bust. In each of those cases, if you just look at the number of jobs that were displaced each year, and you look at what we see coming in the next ten years, this new shift is going to be twice as big and twice as fast as anything we've seen before. And the question is can the political system handle that when you're entering that period with historically high levels of inequality.

Our view is it's not really wise to count on that, And if you're a business leader today, you should expect that one way or another there will be a more interventionist role of the state in the economy, if only to keep the folks with pitch folks away from the c suite well to try to manage the transition and help preserve social stability. You know, this is also playing out just there you go. Now, you also talk about the possibility of a spike in interest rates as this

process occurs. That really fascinates me as a student of the Federal Reserve. We've become so obsessed lately with you where our star is? Where is the new neutral level of interest rates? And gosh, you know, at this point in the economic cycle, shouldn't rates be higher so that there's ammunition there for the next recession. You're actually saying rates are going to go considerably higher. Talk about well, just to be clear, I'm talking about long term rates,

and I'm talking about a multi year view. So I think yes, and and and a trend that will play out really over call at the next three, five, seven years. In the very near term, there's likely to be a cyclical recession at some point in the next twelve eighteen, maybe twenty four months. When that happens, probably short term rates will come back down a bit again. Uh. Now, to your point, government has limited ammunition, but but there's some ammunition. And in a cooling economy to expect short

term rates at least to be low. But as this automation trend plays out and there's a huge new demand for capital, one other thing is going to be happening at the same time, and that is that the supply of capital won't be growing at the same rate it has historically. And again that comes back to demographics. So this long period of low and falling interest people saving for the pensions and actually living that pation. Fewer people

in their peak saving years. So when we look around the world in any given country, it's the share of the population that's called it forty five to sixty or sixty five, that's the peak savers. When that share peaks, that's when you get maximum savings. Remember Ben Burnanki talking about a savings glut that was the global population, you know, peaking in that in that age segment. Well, guess what, as we continue to age, we're now coming out of

that segment. Japan was the first to get there. And as you continue to age, you actually start consuming again. You have to draw down your savings, so we won't be getting this huge build up of savings from demographics. And at the same time, we'll be getting a huge pull of those savings to fuel the investment boom. And so that's where we see those two things over time leading to a rise in rates at the back end of that. Any good investment boom is usually followed by

an investment bust. Talked about this increasing pressure on employment in the back half of the next decade, and so I would expect rates to come down again, maybe pretty sharply for at least for a period of time, but between now and then there will be this rise we believe as as those supply demand trends play out. Well, there's that mention of Japan again. I want to come back to Scott's question and broaden it. I mean, it's Japan just the laboratory for everything right now, the canary

in the coal mine. I mean, there's there's I mean, not just on labor, but the phenomenon you just described, the savings or labor automation capital. You know, Japan has has got some unique characteristics just in terms of their geopolitical situation. Um, you know one one for example, immigration. It's obviously very contentious in many Western countries now, but in the boom years it provided a big part of the labor force growth. Japan's never really had an openness

to large scale immigration, even when times were good. They're tweaking that a bit at the moment. They're starting to tweak that. They're talking about getting more women into the workforce, but there's only so many levers you can pull, which is another reason why you see them at the forefront of automation. So to get back to this idea, of the three trends which boosted the global labor market baby boom, is China and India coming online, rise of women in

the workplace, Let's look at that middle one. Amid all this talk about deglobalization and talk about a new competitive relationship between the US and China, is it really appropriate to talk anymore about a global labor pool. So one of the other trends we talk about when we describe the Great Transformation is this pullback from globalization. And that's

partly political, but it's partly economic as well. And some of the outcomes of this technology growth are that it allows companies to produce more closer to where the demand is, and that is going to reduce the appeal of this

you know, call it the China development model. But it was the Korean development model and the Japanese development model before that, and if you go back far enough, it was the US development model sentoting with the garment industry and right, so that I don't think it's going to be a viable growth model anymore for these countries with large pools of cheap labor, and there's going to be too much of the value added that comes from manufacturing,

that comes from local production, local distribution, more of a digital and experience based economy. And so I think it's it's a very fair question. You know, when we talk about a global labor market and you know, huge free flows of labor and migration and trade. You know, not to say that that stuff goes away by any means, but it doesn't have the same kind of rapid growth and expansion that we've seen in the past. Two quick

questions come from that. Number One, I was in Vietnam recently and the story was all about China being an exporter of manufacturing labor to places like Vietnam. You seem to be calling that into some sort of question. They're saying China was sending labor to Vietnam where they were putting capital into Vietnam to do production there. It's the latta,

but described as the form. Well, so I think the latter clearly makes sense as China's own labor costs grow and they become a producer of lots of capital if they're looking for opportunities to invest that um. So there's clearly going to be sectors where labor costs still matters a lot and where there will be opportunities for lower cost countries to produce. But at the scale and the kind of broad based impact on the economy that we've seen,

it's going to be very hard. I like the way you sketch this from a Japanese model, Korean model, Chinese model. I guess in between that you could have squeezed Taiwan as well. Now, some of the buzz at the moment is that you know Africa is going to be next, and people talk about what's going on in Ethiopia. Is it too late for Africa? Has technology caught up with this model? Well, again, I think there will be individual countries Africa as many many countries in different situations, and

so it's more often reminded it's not a country. There will be places where that model, you know, works well, and I think there will tend to be places where there's at least enough of a potential domestic market that it's not just export dependent growth. But you know, if you're asking, as you look across Africa, is there a pool of labor there that can do for that region, that continent what happened with China In our view, the answer would be no. Andrew Shradel of Bain, thank you

very much for being with us. You can find the report Labor twenty th at Bain dot com or just punch that into your favorite search engine. Andrew, thanks for joining us. Thank you. Benchmark will be back next week. Until then, you can find us on the Bloomberg terminal, Bloomberg dot com or Bloomberg App, as well as podcast destinations such as Apple Podcasts, Spotify or wherever you listen. We'd love it if you took the time to rate

and review the show. Some more listeners can find us, and you can find us on Twitter, follow me at Scott Landman Dan you're at Moss Underschool Eco. I think you can follow up reports from Mark asked Andrew Schiddell and his colleagues at Dane Insights. Benchmark is produced by topor Forhez. The head of Bloomberg Podcasts is francesco Leavie. Thanks for listening, See you next time.