16th February 2021 | Demographics | Capitol

A shrinking workforce will increase wages; the Capitol rioters and financial precarity

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#1: The shrinking global workforce

Although the global population is still growing—and is expected to keep doing so at least until 2050, depending on whose demographic assumptions you believe—the rate of growth is slowing down. Danny Dorling spends some time in his 2020 book Slowdown explaining why this matters, and the World Bank believes that the global workforce has been shrinking for almost a decade now.

So I was interested to see that Bloomberg’s John Authers had hosted a round table discussion on this very question, and released a sprawling transcript. Participants included Manoj Pradhan, co-author of The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival, the economist Blerina Uruci, and Bloomberg’s Stephanie Flanders. Some of the discussion gets technical.

At the start, Authers summarised the theme of the book this way:

The critical point in the book Manoj wrote with Charles Goodhart is that we are in for a long-term secular uplift in inflation. That fundamentally is because the total size of the working age population of the developed world, relative to the retired population, is about to start a long-term decline. With labor more scarce, they argue, workers will be able to negotiate for higher wages, and this will translate into inflation (and also into a decline in inequality).

John Authers is a good analyst, but it’s striking that he constructs this question as being first as about inflation, with the decline in inequality as an afterthought. In fact, the participants spend little time on the (generally good) consequences of reducing inequality. Part of the reason that wages will increase is that firms will need to invest more, which will increase productivity. Manoj Pradhan expands on this:

Part of the reason that productivity in the advanced economies has been weak over the last few decades may just be because of the massive surge in labor supply. Why invest when falling real wage growth and steady demand are pushing up profits anyway?… We are arguing for the reversal of this abundance of labor. Labor is still cheap in China but the ratio of U.S.-China real wages has come down from 35-times to 5-times over the last 20 years -- that is incredible. With global labor supply growth turning south and the globalization in reverse, firms will invest more. That will push productivity higher, though not miraculously, and support higher wage growth.

The book was written before the pandemic, although Pradhan suggests it reinforced some of these trends, while throwing some wildcards in (such as how much productive capacity will be destroyed by the pandemic). But one thing it has underlined is the influence of the elderly in an aging society:

The political power of the elderly has been clearly shown here. Every government has the responsibility of protecting its citizens, regardless of age… The revealed preference, if we can steal that term for politics, has been to shut down the economy despite lower risks to the young from the pandemic, in order to protect the old. It is ethically the right thing to do without a shadow of a doubt in my mind, but it should also serve to illustrate the power that the elderly wield.

A couple of points from me. First, I suspect that when the dust settles on the period from the 1980s to the 2000s we’ll find that demographics and globalisation had much more impact on wage stagnation than technology did. Second, that against this demographic background, we’re going to need automation and robotics to make the workforce sufficiently productive (rather than the ‘AI will lead to endless unemployment’ thesis). Third, that the long period of low-to-no inflation was a political choice. The policy class is obsessed by it, but steady lowish inflation helps to fix distributional problems and reduces real debt levels. Which our economies might well need in the coming decade.

#2: Capitol rioters, status and money

One of the observations about the Capitol Hill rioters immediately after 6th January was that many of them seemed affluent. Some had bought plane tickets to be there, for example. But the Washington Post has been going through the court depositions, and it seems that the story is more complicated than that. The majority of those arrested for their part in the riot on the 6th January have a history of financial trouble:

Nearly 60 percent of the people facing charges related to the Capitol riot showed signs of prior money troubles, including bankruptcies, notices of eviction or foreclosure, bad debts, or unpaid taxes over the past two decades, according to a Washington Post analysis of public records for 125 defendants with sufficient information to detail their financial histories.

Their bankruptcy rate was nearly twice as high as that of the American public, The Post found, and one-fifth had faced losing their home at one point. The article lines up a string of social scientists to discuss the relationship between declining status and politics—apparently extreme rights wing movements prospered in the US in the 1950s for similar reasons.

“I think what you’re finding is more than just economic insecurity but a deep-seated feeling of precarity about their personal situation,” said Cynthia Miller-Idriss, a political science professor who helps run the Polarization and Extremism Research Innovation Lab at American University, reacting to The Post’s findings. “And that precarity — combined with a sense of betrayal or anger that someone is taking something away — mobilized a lot of people that day.”

The two best theories (as Ian Christie reminds me) of the state of American politics are by Peter Turchin and Reme Girard. There’s not space to explore this here, but Turchin’s model is about the interplay of falling real wages, rising asset prices, and elite competition. Girard has a theory about mimetic desire. The Washington Post story sits exactly where these two theories intersect.

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