The great contraction

A regular theme of these notes is the regime change underway in geopolitics, globalisation, and economic policy.  Another regime change is a global demographic transition: the great contraction of the global labour supply.

Global labour markets are tightening structurally, with implications for wages, the income distribution, and business/growth models.  Firms, investors, and policy-makers need to adapt to a new world, very different from the era of low cost, abundant labour supply that has prevailed over much of the past few decades. 

Labour markets are already tight across advanced economies.  Unemployment rates sit close to record lows in the US, the UK, the EU, as well as in Australia, New Zealand, and beyond.  Some of this is due to reduced participation rates after Covid, notably in the UK and the US, as some people withdrew from the labour force, voluntarily or because of sickness.  There were also substantial numbers of excess deaths, although on a smaller scale than in previous pandemics.  And some countries have seen reduced migration inflows.

Higher wages and flexible working arrangements will pull people back into the labour force over time. But a structural change is underway in global labour markets. 

A global labour market

A big driver of disinflationary growth across advanced economies over the past few decades has been growth in the effective global labour supply: strong demographics, the integration of multiple large emerging markets (notably in Asia) into the global labour force, and rising participation rates.  The headline global labour force has grown by >50% since 1990, from 2.3 billion people to ~3.5 billion today. 

This note is available in full at: https://davidskilling.substack.com/p/the-great-contraction