The coming transformation - BBH

"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 simulative and demographics are causing a shift that few have yet to recognize," BBH analysts explain.

Key quotes

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."   

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.