How does capital respond to a labour shortage?

An article in the Wall Street Journal last week got me thinking again about of the bigger medium term questions in macroeconomics. Namely, what should we be worrying about more: not enough workers or not enough jobs?

On the one hand, the world is undergoing a demographic transition and the one off impact of China’s entry into the global economy may have run it’s course.

If I had to pick one graph to show “what’s happening in the world right now”, this one would be pretty high up my list:

This is the core of the Goodhart-Nangle thesis (on which I’ve blogged lots, much of it summarised here).

The short version of which (at least the Nangle variant) is that a rise in the working age share of the Western population coupled with the near doubling of the global workforce available to global capital in the 1990s and 2000s led to a global glut of labour. That global labour glut reduced labour bargaining power, suppressing wages, holding back the need fore capital investment and ultimately driving real interest rates lower. As he writes: “labour power sets the neutral interest rate”.

And if the demographic transition is going into reverse then we may see a world of increased labour bargaining power, higher wages and higher real rates.

But whilst some are pointing to a potential shortage there are plenty of others fretting about the impact of technological change on employment. It now seems impossible to read the econo-financial press or blogosphere without reading at least one “are the robots going to take all our jobs” piece a week. The most sophisticated of which is was (unsurprisingly) Andy Haldane.

So — which to worry about: not enough workers or not enough jobs?

Toby Nangle has blogged on this and been admirably straight forward:

I’m more of the view that there have been waves of concern stretching back pretty much forever about the degree to which technology will deliver mass unemployment and crippling real wage cuts, but these have all so far come to nothing. Meanwhile, there is a massive demographic transition coming through in front of our eyes, the upshot of which appears to me likely to deliver labour some bargaining power.

Toby has a point. It’s always struck me that worrying that “robots might take all jobs” is a little strange at a time when business investment has been weak and productivity growth exceptionally weak across most of the advanced economies.

But what if both Goodhart-Nangle and the techno-optimists/pessimists (depending on how you look at this) are right?

Whilst they couldn’t both be right at the same time, they could both be right in sequence.

As I’ve written before, my main critique of Goodhart-Nangle is that it is too mechanical in how it sees a developing global labour shortage feeding into wage growth. Labour market outcomes are about more than supply and demand, they are process shaped by political economy and institutions — indeed the division of wealth is perhaps the core of the political economy process.

So whilst slower growth in the workforce should give some headwinds to wage growth it won’t necessarily be the only factor in play.

Which takes me back to the title of this post and what I increasingly think is the core question in this debate: how does capital respond to a labour shortage?

And if that terminology sounds excessively Marxian… blame Toby, he started by referencing Lenin in his original paper.

The WSJ article that helped clarify my own thinking was on Arizona and the impact of a multi-year crackdown on illegal immigration. The state provides a neat case study of what happens when a labour shortage develops.

At first glance the numbers appear to back up the Goodhart-Nangle argument:

As the Arizona economy recovered, a worker shortage began surfacing in industries relying on immigrants, documented or not. Wages rose about 15% for Arizona farmworkers and about 10% for construction between 2010 and 2014, according to the Bureau of Labor Statistics. Some employers say their need for workers has increased since then, leading them to boost wages more rapidly and crimping their ability to expand.

But faced with a shortage of workers and rising costs, capital responds. The labour market doesn’t operate in vacuum.

Here’s how on Arizona pepper farmer has responded:

He says mechanization is his future. He continues to pour time and money into a laser-guided device to remove stems from peppers, which pickers now do by hand in the field. Another farmer in the area developed a mechanical carrot harvester.

Mr. Knorr says he is willing to pay $20 an hour to operators of harvesters and other machines, compared with about $13 an hour for field hands.

Take away cheap labour and business models that rely on it existing will adapt or die. The way to adapt is to investment in labour-saving technology.

It seems perfectly reasonable to assume that as demographics bite , then labour will become scarcer and some bargaining power will restored (exactly how much will depend on the structure of labour market institutions that vary economy to economy).

But the bigger issue is how long that rise in bargaining power will last?

And my best would be years rather than decades.

It will provoke a response. If a global labour glut has been one factor holding down corporate investment for decades then its reversal should see investment pick-up. This could help allay some fears around productivity growth but won’t do much to combat inequality.

Just as farms are mechanising in Arizona we could see much more mechanisation in lower waged sectors from retail to logistics.

It’s perhaps best to think about this demographic transition as a series of moves and counter-moves, actions and reactions rather than as linear process. Reading Karl is helpful to understand it but Karl Polanyi rather than Karl Marx.