Business

How are economies adapting to a shortage of workers?

BY Ian Stewart   /  3 December 2018

The global recovery since the financial crisis has not been vigorous. But it has been running for 11 years and it has absorbed a lot of workers. Globally a record 3.3 billion people are in work, 14% more than ten years ago.

Some economies are running out of workers. In the US, Japan and Germany the unemployment rate is at the lowest level in more than a quarter of a century. UK unemployment, at 4.0%, has hit a 43-year low. Agreed, in France, Italy and Spain unemployment, though declining, is still relatively elevated. But it’s a different story in most of Northern and Central Europe. In the Czech Republic, Hungary and Poland, for instance, unemployment is at record lows and below rates in the UK or Germany. Such is the shortfall in labour supply in Poland that the authorities issued work visas to 1.7 million Ukrainians last year.

A shrinking working age population and seven years of growth have left Japan with acute skills shortages. Firms are competing for workers by offering more full-time contracts with generous benefits, reversing a long-term trend towards part-time and contract work. The government is even rethinking Japan’s longstanding opposition to immigration. In a move that has proved politically controversial the government is proposing to create two new visa categories for foreign workers.

Germany is in a similar situation. Its population is ageing, unemployment is at multi-decade lows and skills shortages are widespread. As in Japan government proposals for easing controls on skilled immigration have run into political opposition, particularly from the far-right AfD party. It is a sign of the times that Germany’s defence minister has suggested that the country might need to allow other EU nationals to serve in its armed forces to alleviate skills shortages.

In America and the UK a tight labour market has driven wage growth to the highest level in ten years. Both countries have seen a marked rise in workforce attrition, or the rate at which people change jobs.

In the UK’s case the effects of low unemployment have been exacerbated by a reversal of a long-term trend of people coming from overseas to work in the UK. In the last ten years 1.8 million of the extra 2.8 million new jobs created have been filled by overseas born workers.

Today this section of the workforce, which makes up 17% of all employment, is shrinking as departures of overseas-born workers exceed arrivals for the first time since the financial crisis.

The decline in the overseas value of UK earnings, Brexit related uncertainties and plentiful jobs in Central Europe have all contributed to this reversal. (Curiously net migration to the UK from outside the EU, which includes workers and non-workers, has risen to a 14-year high. The swing factor here seems to have been a rise in students coming to the UK from Asia and more visas being granted to families of non-EU citizens who are already here.)

The obvious response to a shortage of supply in any market is for the price to rise. So it is in the labour market. Companies in much of the industrialised world are facing higher wage bills. In the UK a string of companies, including Royal Mail, Ryanair and JD Wetherspoon have warned that rising wage costs will affect profits.

Very low levels of unemployment mean businesses will need to work hard to recruit and retain staff. Offsetting rising wage costs through raising productivity will become a greater priority. That is likely to involve more training, reorganising work and investing in labour-saving machinery and technologies.

In the late 1990s, at a time of very low unemployment, there was much talk among employers of how labour shortages had created a “war for talent”. That was turned on its head by the global financial crisis, creating a “war for jobs” as unemployment soared. Now, ten years on, many western economies are running out of workers. The war for talent looks as if it’s back on.

PS: Last week the National Institute of Economic and Social Research (NIESR) and the UK government released estimates of how different Brexit scenarios might affect UK growth in the long term. The Office for Budget Responsibility’s currently estimates that trend UK growth is 1.5%. Taking the average of the NIESR and Treasury estimates, a no-deal Brexit could lower the UK’s long-term trend growth rate from 1.5% to 0.9%. On the same basis a transition deal and a future free trade agreement could reduce trend growth to 1.2% per year.

The Bank of England also released estimates of how different scenarios might affect UK growth. Its analysis shows that in the worst case of a disorderly no-deal Brexit, GDP could be 8% lower than its current forecast by the end of 2023.

PPS: In February, we wrote about the high proportion of graduates – roughly half – who are employed in non-graduate roles. The Institute for Fiscal Studies last week reported that a third of English male university graduates were financially worse off at age 29 than peers who had not been to university. University is a better bet for women. 99% of female graduates see an uplift to their earnings relative to non-graduate peers at the age of 29.