A labour shortage can be a blessing

Do rich nations need more poor workers? The answer is yes, according to the conventional wisdom, which finds expression in a new United Nations report on migration and development. The UN says that in developed nations 10 years from now there will be only 87 young entrants to the labour force for every 100 retirees. To forestall a labour shortage in the developed world, the report says that rich nations should turn to developing countries, which will have 342 new labour market entrants for every 100 first world retirees.

This assumes that a labour shortage in the developed world is an evil to be averted. But is it? In the ageing nations of the first world, the benefits of a labour shortage, in the form of higher productivity growth and higher wages, might outweigh the costs. Where labour is scarce and expensive, businesses have an incentive to invest in labour-saving technology, which boosts productivity growth by enabling fewer workers to produce more. It is no accident that the industrial revolution began in countries where workers were relatively few and had legal rights, rather than in serf societies where people were cheaper than machines.

We witnessed this cause-and-effect relationship in the US in the 1990s. Because the bubble economy created a tight labour market, there was a wave of investment in labour-saving technology – from automated self-checkout at supermarkets to the replacement of security guards with computerised systems. The availability of low-wage immigrant labour has caused the US to lag behind Japan, Australia and others with advanced mechanical harvesting. And thanks to a glut of cheap labour, home construction in the US remains low-tech and inefficient. A tight labour market would force rapid productivity gains in non-traded domestic industries that today are labour-intensive.

To be sure, a growing percentage of the workforce in advanced nations is employed in services such as nursing, lawn care and toenail painting, which cannot be done by machines. In these fields, wages would go up as a result of a tight labour market. What is wrong with that? The trend towards inequality in western societies would be ameliorated, as the affluent paid more for necessary services (nursing) and spent less on conspicuous consumption (lawn care and toenail painting). Would higher wages not drive inflation? Not if productivity growth were adequate.

It is a myth that affluent countries must import vast numbers of immigrants to maintain the age ratio between tax-paying workers and retirees to prevent the collapse of social security systems. The immigrants themselves will retire, requiring an even greater expansion of immigrants. According to the UN, in order to maintain its current worker-retiree ratio, the US would have to absorb 10.8m immigrants per year (10 times the present amount) until 2050, when its population would be 1.1bn.

Productivity growth can solve much or all of the pension funding problem. In the US, for example, the ratio of workers to retirees will go from 3 to 1 today to 2 to 1 in 2080. This is quite minor, compared to the shift from an 18 to 1 ratio in 1950 to the 3 to 1 ratio of today – a shift made smooth and painless by productivity growth in the past half century. If productivity growth is not adequate, moderate benefit cuts and longer careers can do the rest.

But doesn’t national prosperity depend on population growth? Here a final economic fallacy rears its head – the confusion between gross domestic product and per capita income. GDP is the sum of a nation’s labour force multiplied by output per worker, which explains why the countries that lead the list in GDP tend to be the most populous ones: the US, China, Japan, India and Germany. Compare the quite different list of countries with high per capita income, measured by purchasing power parity: Luxembourg, Norway, US, Ireland, Iceland, Denmark. Then there is the list measuring social equality: Denmark, Japan, Sweden, Belgium, Czech Republic, Norway. The individual is arguably better off in a less populous country with a higher median income than in a more populous one that combines a larger GDP with extreme poverty and inequality.

Ageing populations and shrinking workforces present challenges to developed countries. But those challenges can only be met by technology-driven productivity growth, not immigration-driven population growth. If it stimulates automation, raises wages for poor workers and reduces inequality, the impending labour shortage in the advanced industrial nations may be a blessing rather than a curse.

Michael Lind is the Whitehead Senior Fellow at the New America Foundation

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