The world is on the cusp of entering a new labour market. As western economies grapple with demographic shifts and labour mismatches, a new set of opportunities and risks have appeared for investors. PGIM thematic research group director Jakob Wilhelmus outlines what they should look out for in this new world order.
The world is on the cusp off entering a new labour market as western economies grapple with demographic shifts – ageing populations, shrinking workforces, labour mismatches and the rise of new technology.
Dealing with the first issue, many countries continue to treat Japan as the classic case study of dealing with an ageing workforce. However, investors have been warned that the country’s macroeconomic experience was, in fact, an “outlier”.
In a podcast interview for Top1000funds.com, Jakob Wilhelmus, PGIM’s thematic research group director, said he’s concerned that Japan has become a “distraction” for investors.
His latest Megatrend research paper, The Transformation of Labour Markets, identified declining working-age population and labour mismatches as two main elements behind the world’s changing workforce. For most countries, Wilhelmus said these two factors would mean higher inflationary pressures, which was not the case in Japan.
“There are really two reasons for that [increasing inflationary pressures]. One is the fact that a decrease in available workers will increase wages, which in turn will lead to higher price inflation,” he said.
“And second… the growth of that [retiree] segment of society will lead to more consumption, higher fiscal spending and less production.
“This was very unlike the experience that Japan had two-three decades ago, and that is because it took choices that maximised the disinflationary impact by deciding against immigration, and instead started to outsource its production.
“But when you look at the realities of today, countries are facing a very different situation where labour is becoming scarce almost everywhere.”
Industries on notice
Labour mismatch refers to the structural imbalance between labour demand and supply and, according to Wilhelmus, often gets mistaken as short-term cyclical shortages.
He pointed to the example of China, the country with the most STEM graduates in the world. Despite abundant talents, the country’s youth unemployment rate is over 20 per cent in 2023. Wilhelmus attributed the phenomenon to a discrepancy between China’s main economic activity (manufacturing) and its worker’s sophisticated skills.
“The situation is very similar here in the US, Australia or Europe. There is a big gap between the demands of the job market and the skills the workforce possesses or can offer. In certain advanced economies, it’s particularly around vocational jobs like nurses and electricians.”
When it comes to potential solutions for the mismatch, Wilhelmus said policy choices will play an important part.
“On the one hand, it is immigration, which is a very loaded topic. But realistically, almost every country will have to figure out how to track global talent in a world where most countries will be competing for the same pool.
“On the other hand, its participation rates… because the reality is that while many countries have come a long way, the female participation rate is too low, and finding ways to increase that can increase economic output significantly.”
The lesson for investors from these insights, Wilhelmus said, is to think twice before buying into the new labour market’s hype, of which generative AI is a prime example.
“It’s in some way very similar to the early days of the internet. AOL and Netscape looked like earlier winners, but those are two names that few investors want to remember,” he said.
“It’s really about the infrastructure to run those services and the underlying models, and not so much about the applications. That means investments in data centres – both the providers and the actual real estate – as well as chip manufacturers.”
He also suggested that investors based their analysis more on countries, and less on asset classes. As countries face different demographic stages, they will have different growth rates.
While advanced economies are already struggling with inflationary pressures, emerging markets such as Asia and Latin America may be less threatened, while South Asia and Sub-Saharan Africa regions are just seeing the benefits of a young and growing population.
“But here the challenge is that demographics alone do not guarantee economic growth… because most of the countries in those latter two regions really lacked the high levels of human capital and institutions that are needed to unlock the economic prosperity that can come from a growing workforce.
“It is really about a holistic assessment of the turning point in global labour markets and working through all of its implications.”