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- Worker shortages are hitting labour markets in advanced economies hard. Without a massive inflow of foreign workers, countries like Germany will soon see their workforce shrink.
- After several decades of declining bargaining power and stagnating wages, these trends might now finally reverse as adverse demographics are increasingly leading to labour scarcity.
The Decade-Long Decline in Workers’ Bargaining Power
The decades after 1980 saw inequality rise in advanced economies as the bargaining power of workers declined.
Globalization and financialization exposed manual workers, meaning certain industries became uncompetitive and were offshored. Incomes at the bottom of the distribution fared worse.
Meanwhile, house prices have seen significant gains, especially in large metropolitan areas. And creative and professional workers, meaning people in white-collar jobs like the tech sector and finance, for example, have seen their wages increase significantly. Economist Richard Florida recently described this phenomenon as winner-takes-all urbanism.
Manufacturing Employment in Decline
Manufacturing is a good example of the blue-collar decline. It has seen a long-term fall in employment. While this trend has been more pronounced in the Anglo-Saxon economies than in Germany, known for its strong manufacturing sector, even there the employment share of manufacturing has almost halved since the 1970s.
The UK has seen its employment share in manufacturing drop significantly as the economy became more service and finance oriented. Similarly, many US industries were exposed to the China shock, which has contributed to economic stagnation in the “Rust belt.” This adverse economic trend has increased inter-regional inequality, with some regions falling behind as many industrial jobs disappear within a relatively short time.
Service Workers Have Struggled
Besides manufacturing, many service workers have also experienced income stagnation. Workers in the service and hospitality industry are probably less well off in large metropolitan cities like London where living costs are significantly higher. Jobs that pay wages at the lower end of the distribution hardly compensate for the regional divergence in living costs. Service workers therefore face increasingly long commuting times because runaway house prices have been pushing them out of the city into the suburbs.
The Wage-Share Problem
The wage share, the share of GDP that is labour income instead of capital income, has been trending downwards for several decades. This indicates that salaries have been increasing at a slower pace than nominal GDP. Rising asset prices, particularly real estate, are partly why. And since capital is unequally distributed within society, inequality increased.
Most people derive the largest share of their income from wages, after all. So no wonder there has been increasing economic discontent in recent years, which also translated into rising populist vote shares, both in Europe and US.
Reversing the Decline: Demographic Shifts Benefit Workers
But signs suggest the tide is turning quickly, with workers in advanced economies regaining bargaining power. The post-pandemic labour market has been super tight with a record high vacancy rate and record low unemployment, especially in the US and Germany. But we have also seen this in the UK, despite more sluggish economic growth.
The vacancy to unemployment ratio surged above one in many advanced economies, showing labour demand has outstripped supply. And even as we head for a slowdown in the current economic cycle, the ratio remains well above its pre-pandemic trend.
The Great Retirement
Aging populations are intensifying the worker shortages. While this demographic shift has long been in the making, it has started to bite in recent years. The workforce in several advanced economies like Germany or the UK has already started to stagnate or even decline.
In the US, labour demand had already begun to outstrip labour supply a couple of years before the pandemic. Two factors drove this.
First, after years of sluggish recovery, the economy finally approached full employment.
Second, the demographic slowdown is increasingly affecting the US economy as Baby Boomers leave the labour market. The number of retirees not in the labour force increased by about 20 million over the last decade, from 35 million in 2010 to over 55 million today.
The industries with the highest share of older workers will be affected the most by this trend. These are educational services, public administration, utilities, and real estate.
Wage Growth Accelerates Amid Worker Shortages
As the worker shortage increasingly hits the labour market following the pandemic, wage growth has accelerated. The following chart shows it is a job seekers’ market. Workers who switched jobs have seen significantly higher wage gains than workers who stayed with their employer, according to data from the Atlanta Fed.
The hot labour market in the US has also empowered workers, who are increasingly pushing for more unionization. While union membership is still low for now, support for labour unions is now at a five-decade high. Workers at Starbucks, Amazon, and Chipotle have recently unionized in a demand for higher compensation and better working conditions. Doubtless, the worker shortage is increasing the pressure on companies that employ blue-collar workers to offer better salaries and benefits packages.
Work stoppages are at their highest in decades.
This is ultimately a good thing. Many workers were left behind during the timid recovery from the financial crisis when the labour market was very weak. And for the first time in decades, low-income workers are seeing larger wage gains than people at the top of the income distribution. Amid the startling layoffs in some white-collar occupations, especially in the tech sector, shortages for blue-collar occupations remain. And that is precisely why workers in construction, trucking, retail and hospitality have been able to push for higher salaries in recent years.
Brexit and Aging Create a Tight UK Labour Market
While the UK economic recovery from the pandemic has been weak, the British labour market is tight. Brexit is a factor. It has led to worker shortages across multiple blue-collar sectors. And over half a million people have left the workforce for health reasons.
Moreover, demographic change is affecting the country, with some workers retiring early when the pandemic started. Consequently, labour supply has stagnated.
This labour shortage, together with a massive cost-of-living crisis and years of income stagnation, have led to higher wage demands and a surge in work stoppages in the UK. In fact, strikes have reached levels not seen since Thatcher in the 1980s – a government famously known for union busting and weakening worker power.
In 2022, some 830,000 days of work were lost due to strikes, compared with under 50,000 for the years before the pandemic. And strikes have continued throughout 2023.
The good news is that real wages are now finally rising. The commodity price and food price shock has finally abated, and inflation is falling more sharply than expected, at 4.6% now. With nominal wages still growing above 7%, real wages have turned positive again.
Conclusion: Is the Return of Worker Power Good News?
There are clear signs bargaining power is now shifting back to workers, specifically blue-collar workers. The demographic change is creating worker shortages in the US, Germany, the UK, and other advanced economies. And manual occupations are affected most, which is precisely why low-income workers have seen the largest wage gains since 2020 in the US.
But is that a good thing?
While the current burst of inflation is certainly bad news, we should probably welcome the fact that workers are not losing out anymore. And there are reasons to be hopeful that rapidly rising wages could also lead to higher productivity, which would be good news for the economy and overall living standards.