The Coming Transformation

It is an amazing set of circumstances. The combination of strong growth impulses fueled by supportive monetary policies, and in several large economies (e.g., US and Japan) fiscal policy is also stimulative and demographics are causing a shift that few have yet to recognize.

There is a profound shortage of workers that is beginning to become more evident and this will have far reaching implications. This labor shortage contrasts with the surplus capital (see my book, Political Economy of Tomorrow). The disparity of wealth and income (which also means life opportunities) that some observers see as threatening representative government, is unlikely to change on its own volition as if there is some natural law that will be enforced.

The best chances of a shift may be a material change in the relative supply and demand for labor. Depending on various considerations, such as institutional capacity, legal framework, social convention, countries will respond to the labor shortage.

Recent developments in Germany and Japan illustrate some of the forces at work. I.G. Metall represents about 3.9 mln German workers. They have held a series of short warning strikes (that last a few hours) this week as negotiations begin. Their demands are two-fold. First, they seek a 6% pay increase. They see record corporate profits, rising equity prices, increase executive pay, and they know there is not "reserve army of unemployed."

They also are seeking something like what in the US is called family-leave. I.G. Metall wants individuals to have the right to reduce the work week from 35 to 28 hours for up to two years to take care of family members (e.g., children, elderly), and the right to return to full-time work later. Moreover, to compensate those workers who are worker fewer hours, the union wants them to receive an extra 200 euros a month. Reports suggest that it is the first time in more than 20 years that the issue of hours is part of the negotiations.

The employers (Gesamtmetall) have offered a 2% wage increase and a one-off payment of 200 euros. They are balking on the hours ostensibly because it would exacerbate the already acute labor shortage. Reports suggest that around a fifth of all companies in the sector are unable to produce at full capacity due to the shortage of workers. There are more jobs opening in the metal industry than the number of registered unemployed in Germany.

Japan has been wrestling with shortage of labor longer and although it has not translated to higher wages, important changes are taking place. There are currently 1.56 jobs per applicant, the most since the mid-1970s when Japan was growing quickly. There are a number of concrete signs of the shortage, form unfinished construction sites to hiring difficulties to septuagenarians being induced to re-enter the workforce.

According to reports citing Tokyo Shoko Research, the number of Japanese bankruptcies triggered by a shortage of workers doubled in 2016-2017. A concrete example of how some businesses are coping is the convenience store Lawson. Reports suggest due to the shortage of workers (and technological advances) it will soon not staff some of its Tokyo outlets during early morning hours.

The shortage of workers in Japan is so profound that it is helping the country overcome it traditional resistance to immigration. For the past two years, there have been over one million foreign workers in Japan and many have customer-facing roles in restaurants, retailers, and hotels. In April, workers that have had part-time jobs for five years can demand to be regular employee status.

Japan has also coped with the shortage of workers by increase the participation rate, especially of women in the work force. Even if they might not be known a priori, there are limits on immigration and increasing the participation rate. Boosting capex to boost productivity has also been encouraged.

Although the US unemployment is around levels that economists, including many at the Federal Reserve, regard as full employment, the under-employment rate (U-6), which includes those who desire full-time work but could only secure a part-time position, stood at 8.1% last month. That is roughly the low from the past cycle, but in the early 2000s it was below 7.0%. The unemployment rate for those with a college degree is 2.1%. In 2006 it was 1.8% and in 2000 it was 1.5%.

While there are some signs of a growing labor shortage in the US, it does not seem as acute as in Germany or Japan. The recently announced tax changes seem to favor corporation through tax cuts, while retaining many key deductions (which implies a lower effective tax rate) and incentives to boost investment (through the ability to write off the entire purchase immediately). The class antagonisms in the US seem starker than in Europe and Japan, though fewer may talk about it in such terms. Employers are likely to resist the kind of change that may be taking place in Japan and Germany, and when coupled with the cultural embrace of technology to solve social problems, the US solution may be boosting productivity.

The shortage of workers in Germany and Japan may encourage employers to consider employees as important stakeholders (alongside shareholders, management, creditors and customers). Employees may be seen not simply as costs, but an essential part of the value-proposition. Many US employers do not appear to share that insight, but do seem to be committed to providing a safe and diverse (ethnic, religion, gender) work environment where identity politics can be celebrated.

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