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Labour in the global context

Labour in the global context

Much of the debate about labour in the wealthy countries has focused on automation within those countries. "Robots", and in prospect "AI" are said to be major causes of job losses.

This all rather ignores what is going on in the rest of the world. The industrial countries have a joint population of about 1.2 bn. The poor nations make up perhaps twice that, leaving around 3.5 bn people in the emerging economies. That number will grow by at least a billion in the next ten years, both through population growth and more of the poor countries participating in global growth. As many of these populations are demographically young, this equates to a huge work force: perhaps outnumbering the old rich world by a factor of three or four. That will rise as the century progresses. Many of these new workers are relatively well-educated, so the industrial world workforce in its entirety may be fewer than the world graduate population.

The only response to this from the old rich countries is to increase labour productivity, which they do with automation. The figure shows something of the situation:

This may need a few words of explanation. Poor countries pay low wages for simple tasks, but high salaries that buy disproportionate benefits for higher skills. Rich countries pay more for modestly skillful jobs, and undertake tasks of enormous complexity which the poor countries cannot attempt.

At the low skill end, very many low wage workers compete for work. Firms that are located in the rich nations have either to improve their productivity or cut their costs, or both. Process re-engineering and automation are common responses, often leading to job losses. As low skill jobs are generally the easiest to automate, it is these people who are displaced onto the labour market. Their wages fall because the jobs that remain are not worth automating, and because they are in over-supply.

Low skill wages do not, however, fall to a level that is set by global competition, quite aside from legal and regulatory controls of wage levels. Automation multiplies the output that a single worker can deliver: that is its purpose. As a consequence, $10 of labour may buy a producer more output in a highly productive environment than it does in a low wage country. Extremely efficient systems can compete with less effective organisations staffed by low wage workers.

On the chart, a region is shown as "productivity parity", the point when high wages paid to low skills break even with their peers elsewhere. That point is currently below the red line, but - given truly remarkable automation - may rise above it, bringing low skilled people back into work and potentially raising their wages. However, that is for the future. At present, an automated plant is th only way to retain globally mobile industry in high wage societies.

This response, though unavoidable in the next thirty years, has the potential to generate social unrest. Automation may provoke unhappy politics, yet without it, firms will go bankrupt or be forced to relocate. Indeed, to keep jobs and national incomes, states need to ensure that automation is driven as far and as deep as possible. The alternative - job protection behind tariff walls - is not viable in even the medium term in today's world. (Which is not, of course, to say that this approach lacks advocates, notably in organised labour.)

So what does this all mean? Plainly, the new workers will not go away, and neither will their ambition for a better life. However, the impact in the industrial countries has been to impact wages, reduce permanent employment in favour of temporary work and in general to create political anxiety. Automation, the salvation of the economy at large, hits hard at the lowest skill workers.

The future offers us an uncomfortable, delicate balance. As old industries are driven to peak efficiency, so new industries need to emerge that are inefficient (for the moment) and capable of absorbing labour. That labour needs to have a portfolio of skills, show flexibility and understand that even the new industries will quickly tighten their labour practices. If the rate at which this occurs is too slow, or if labour absorption is weak, then political containment for the longer term is going to be required.

Social insurance can soften the force of these changes. It constitutes about a third of the European and Japanese state spending, but 10-15% less in the US. It is a huge overhead which the economy as a whole has to carry, and an overhead not found in the poorer countries. Some of it - education, public health - undoubtedly assists the economy. Other elements, from labour law to old age pensions, represent pure overheads, political choices made that carry long run implications. Pensions and geriatric care, in particular, are going o need considerable additional funding, and that will have to come from either increased taxes or the other parts of the welfare budget. This is not, therefore, a good time to be a low skilled worker in a rich country. You will find it increasingly difficult to add more value than you cost to employ, and adult welfare will be a swiftly shrinking pool. The political implications of this will place democracy under an uncomfortable spotlight.