Labour Shortages Are Global

(Stephen Poloz, Export Development Canada)

We hear about labour shortages a lot – there are not enough doctors, carpenters, plumbers, or skilled workers in general (except, perhaps, economists). This is becoming a global problem.

Economists will tell you that labour shortages are not supposed to happen. When something is in short supply, excess demand pushes the price up. This reduces demand and increases supply. When it comes to skilled labour, the supply response is by necessity gradual, and may be very difficult, since it requires education and, perhaps re-education of transitioning workers.

Perhaps the bigger problem is that global population growth is on the decline. Population growth averaged 2% per year in the 1960s and 1970s and has been easing ever since. Growth was 1.2% for the past five years, and this is projected to fall to as little as 0.4% by the 2040s. Some countries are already experiencing population declines, such as Japan, for example.

This slowdown in labour supply has contributed to declines in unemployment rates to near historical lows in many countries. This has made the workers available in emerging markets look even more attractive. In a country where population growth is very low, then, the choice is clear: either allow more immigration to fuel domestic growth, or grow the economy offshore.

An interesting case study is the Czech Republic, where the population has been in decline since the mid-1990s. The share of the population that is over 65 is now 20%, and it is expected to rise to over 30% by 2020. This is much worse than the world situation, where old-age dependency is presently around 10%, and will only rise to about 14% by 2020.

As a consequence, Czech companies no longer talk about the shortage of skilled people, they talk instead about the shortage of people, period. They are willing to do all necessary training themselves. They have gone on recruiting missions to such places as Vietnam or Belarus but are finding that channel of growth to be very costly and difficult to plan.

The solution? Grow the company without labour force growth. That means increasing automation in domestic plants, relying on only the most skilled workers, and expanding the business in other countries. A global production structure, facilitated by international trade, is the quickest route to higher productivity growth, as experience in the U.S. illustrates. That’s why global cross-border investment has been growing by some 30% per year in the last 3-4 years, and why a country like the Czech Republic can see inbound investment growing by 42% per year. Outbound investment is growing even more rapidly, albeit from a lower starting point. And policymakers are catching on: CzechInvest, the government agency traditionally tasked with attracting investment to the Czech Republic, is now in the business of helping Czech companies invest abroad as well.

The bottom line? Population trends are yet one more force fuelling globalization. Even countries with a positive mix of population growth and immigration are likely to see steady upgrading of domestic skills and the increasing use of offshore structures to cope with labour shortages.