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In the New Growth Cycle: Advantage Labour

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By Peter G Hall
Vice-President and Chief Economist Export Development Canada

Overpopulation was a fear that gripped the world in the early 1970s. Back then, demographers contemplated the post-war baby boom, and projected a population explosion that they reasoned was unsustainable. After all, the world was thought to be running out of oil and other key resources. Poverty gripped nations with large and rapidly-growing head-counts. What resulted in many nations was lower fertility rates - either voluntary or imposed - that has left the world with aging populations everywhere, and a dearth of new labour to fuel the next recovery. Does it spell trouble?

Scan modern history, and surplus labour has been a key source of economic growth-renewal. Application of scientific methods and mechanization moved workers from the farm and cottage industries into the factories that powered the industrial revolution. China's vast underutilized population - estimated at some 300 million - was an essential driver of the planet's most recent, and unusually long, growth cycle. But today's largest economies are all struggling with slow-growing or declining populations, and China's one-child policy seems to have caught up with it - labour scarcity is producing some startling annual wage gains in coastal cities, and production is going elsewhere.

Some see this as the end of the growth seen in the nineties and "naughties". Are they right? Hardly. The European population was aging rapidly during this period, yet it still capitalized on global growth. Japan's population ran into growth trouble in the early '90s, and its own growth suffered; but it also engaged in significant outward investment that added considerably to world growth. What these economies appeared to do was economize on its labour by shifting more labour-intensive functions elsewhere, and moving its increasingly scarce domestic labour up the value chain.

If the same trend continues, it assumes abundant labour elsewhere. But with China far less a candidate than two decades ago, many fear not only weaker prospects for China, but for the world as well. These fears are anchored in a belief that the world has exhausted its last source of abundant, productive, and efficiently deployable labour. One problem: the data seem to disagree. Take India, for example. It has a population that rivals China's, only it will still be growing well into the long-term future. At the same time, estimates show that 60 per cent of the population is still dependent on India's vastly underdeveloped agriculture sector. In many ways, India looks like the world's labour release-valve in the coming growth cycle.

But it doesn't stop there. Labour-constrained economies are already engaging in labour-seeking investment, not just in India, but in other population-rich countries. Indonesia has a population the size of the United States, but 12 per cent are still below the poverty line, a potential army of workers. Bangladesh, with its 155 million population is attracting increasing amounts of labour-seeking investment. Vietnam and the Philippines are other key candidates for similar inflows.

Closer to home, Mexico is attracting a lot of inbound investment. Many of these high-profile plays are actually in higher-value-added industries, but Mexico also has a lot of potential to attract more labour-intensive investment. With a population of 120 million and over 50 per cent living below the national poverty line, Mexico is increasingly a magnet for re-shoring of labour-intensive manufacturing. Labour reforms currently underway are only likely to enhance the chance of greater inflows.

This shift in the direction of investment may be one of the great trends of the upcoming cycle. And instead of being billed as offshoring and outsourcing, terms that are more associated with killing jobs in OECD markets, it is likely to be known along the lines of 'importing labour without moving it'. At the same time, as the adjustment occurs, labour in OECD markets is likely to enjoy a period of higher-than-customary wage increases. This process is the most likely catalyst for labour-seeking investment and moving higher-cost OECD labour up the value-chain.

The bottom line? Crisis and the years following have been tough on labour. Although unemployment rates remain high, it looks like the advantage may be moving more in labour's favour.


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