Goodhart-Nangle, Demographic Destiny & Varieties of Capitalism

Duncan Weldon
Bull Market
Published in
6 min readDec 13, 2015


The single most interesting macroeconomic idea to come out financial markets types this year is what it’s being called Goodhart-Nangle hypothesis (after former Bank of England chief economists Charles Goodhart (who’s already got a law to this name) and fund manager Toby Nangle (who you should really be following on twitter if you’re not already)).

I’ve it up here, here & here, a version of Goodhart’s views can be found in Prospect and Nangle’s original at VoxEU (and I’d bet it’s one of very few documents published by a fund manager in 2015 that references Lenin on imperialism).

Goodhart-Nangle is an explanation of the past thirty or so years and a prediction about the future and whilst the Goodhart and the Nangle versions differ, there’s a substantial overlap.

Briefly put, the story runs as follows:

  • A combination of the demographic sweet spot (a rising proportion of the population being of working age) and globalisation (the great doubling of the global workforce available to Western capital post-1990) resulted in a global glut of labour.
  • Faced with an oversupply of workers, the relative price of labour fell pushing down the labour share of national income in the advanced economies and depressing wage growth.
  • The availability of cheap labour reduced the need for labour saving, productivity enhancing capital investment in the West.
  • Lower demand for capital (and less inflationary pressure from wages) reduced real interest rates.

The result: lower inflation, weaker wage growth, lower investment, falling real rates and rising inequality. The symptoms of what some see as secular stagnation but what are to Nangle a reflection of the fact that labour bargaining power sets the natural rate.

But demographics have turned. And Goodhart-Nangle predicts that with this turn, three multi-decade trends (weak wages, falling real rates & rising inequality could turn to).

I blogged on the turn a few weeks ago. And this is perhaps the key chart.

Like I say, the most interesting theory of the year.

But is it right?

I think there’s a strong element of truth in it. But, like any theory, it’s incomplete.

The three things to consider are what I’d call technology, institutions. & politics.


Just as the global oversupply of labour comes to an end, we’ve seen an outbreak of “the robots are coming for our jobs” fears.

Unsurprisingly the best recent contribution to this debate has come from the Bank of England’s Andy Haldane.

I summarised his argument here. And then Brad Delong (who is not only the internet’s best economic blogger but also one its finest subeditors) trimmed my contribution down to this:

…Ignazio Visco, trod much the same ground. Both policymakers are taking the threat of computerisation… seriously…. Historically… waves of new technology have created as many jobs as they have destroyed…. This time might be different, the next wave of labour-saving technology looks to be replacing human brains, rather than human brawn, and the impact could be far more wide-reaching. And, even if this time isn’t different… adjustments… in the past led to a generation or more of economic pain…

Whether the robot labour takeoff fears are right or not (and I’m undecided), it’s worth taking seriously. It could, in Nanglian terms undermine labour bargaining power just as demographics boosted it. In other words the next three decades could look like the last three.


Matthew Klein has written an excellent series of posts on demographics at Alphaville.

This is an implicit (and sometimes explicit) challenge to Goodhart-Nangle through out the series.

Hence this tweet.

His post on Japan is particularly good. Here’s a country which has experienced the demographic turn but where corporate and labour market behaviour hasn’t followed the Goodhart-Nangle script.

Goodhart has (partially)addressed this but Klein is convincing in his counter argument.

Japan’s experience suggests the implications of demographic changes aren’t necessarily what today’s analysts think they are. In Japan, unemployment has consistently been higher than it was when the country was younger, the share of part-time work has grown, and real wages have been either flat or negative for decades.

Some of this probably would have happened anyway thanks to the combination of increasing labour competition from China and the displacement of workers by new technologies. Retrenchment by Japanese businesses after the excesses of the 1980s also couldn’t have helped.

Even so, if the arguments of the demographic determinists were valid, the shrinkage of the working-age population should have helped offset these forces. Yet it’s basically impossible to see much of a difference in the trend share of output going to workersin Japan versus the United States, which not only has dramatically different demographics but also significant net immigration

To me though, this doesn’t necessarily mean that the whole theory has to be binned.

But it does need to be refined. And for me, that refinement means turning to the Varieties of Capitalism literature. (Although to be fair, my natural instinct is usually to turn to the VoC literature).

VoC reintroduces some political economy into straightforward macroeconomics and tries to explain why faced with the same shock: firms, workers & governments might react differently leading to different economic outcomes.

To take the example from the introduction of the book, faced with an exchange rate appreciation one might expect a German and UK firm to react differently (and 1989 study found this to be the case).

British firms generally pass on the cost to customers to maintain profit margins, even if this leads to lower output and higher unemployment. German firms typically absorb the hit to margins to protect market share, even at the price of lower profits.

VoC is an attempt to look at the various factors created not just by the legal framework in which an economy operates but also its historical development, shared norms and culture.

It takes in a huge variety of interdependent factors from corporate governance, to trade unions & bargaining structures, industrial organisation to national training regimes.

The point of this digression into VoC is to make clear that the Japanese experience of demographic change wouldn’t be necessarily repeated elsewhere.

But it’s also a warning against assuming that demographic change will follow the Goodhart-Nangle predicted pattern anywhere else either.

Given all Western economies have experienced the technological change, a rising workforce and globalisation over the last few years, they’ve all seen a broad picture of rising inequality and slowing wage growth. But to vastly different extents.

The global picture matters but so do do national peculiarities.


And so do do politics.

Labour market outcomes aren’t entirely determined by the bloodless interaction of supply and demand curves. Labour bargaining power isn’t just an abstract concept.

And this is where I think Goodhart-Nangle is weakest, on the mechanism (which will vary country to country) which would push wages higher in a broad based way.

It’s intrinsically harder to model and will vary by country. Political coalitions can change over time and whilst the end of a global oversupply of labour should provide a tailwind to the wages, a longer term rise in the wage share could be pushed back by other factors.

The point is, a large enough rise to matter and start reversing multi-decade trends is unlikely to happen seamlessly and will likely be resisted by many of the winners of the last thirty years.

The importance of Goodhart-Nangle

I take three things away from Goodhart-Nangle, all of which are very useful lessons.

Demographics matter. That much is obvious but can easily be forgotten in the day to day world of rarely looking much further than (at most) one political cycle out in politics and often one quarter or year out in firms.

And with demographics at a tipping point, this is a very timely reminder.

Second, implicit in Goodhart-Nangle is an argument that global output gaps matter.

And that’s something that central banks are having to grapple with. National circumstances matter but global conditions have a huge impact on outcomes.

Again, obvious but sometimes forgotten. (See for example almost the entire mainstream political debate on the UK economy 2008–2015).

Finally, my main takeaway from Goodhart-Nangle is that wages in the advanced economy should have a tailwind in the years ahead. A technological headwind might counteract that act. But even if it doesn’t, the evolution of labour bargaining power will be affected by differing national institutional step ups and the dynamics of politics.

It’s a theory worth taking seriously and like all arguments about long term demographic change, it’ll be one that won’t be proven either way for quite a while. This is a debate that will continue.



Duncan Weldon
Bull Market

Economics, finance. General rambling. Head of Research at Resolution Group. All views are my own.