Can technology help solve labour shortages?

The reality of wage increases 

Given inflation has squeezed real wages, fears remain that the tight labour market will continue to result in further wage increases. Some parents would have been frustrated, albeit sympathetic, by further teacher strikes this week in the UK as teachers, amongst a whole host of other public sector employees, are demanding higher wages. Elsewhere, in Germany, public transport workers are striking and demanding wage increases in excess of 10%. 

The momentum is much broader and shows no sign of easing. Governments are in a tight spot. Given that they are mostly running budget deficits, the fear is if they meet these demands this will not only prolong the inflation problem, but also increase the interest burden further as central banks move rates higher as a result. Over the medium term, this situation requires tax increases, austerity or worryingly increasing budget deficits. 

While we can extrapolate the current situation, it is worth pausing and reflecting on the wider picture. Five years ago, the focus was on automation making a lot of jobs redundant and whether governments should adopt a universal basic wage. Furthermore, the recent release of the AI-powered Chatbot, ChatGPT, has caused a storm and the narrative following its widespread use is which jobs will be made redundant as a result. A rather confusing picture if you followed just these two narratives.

Thankfully, economic theory can help explain some of this in a wider context. In order to increase the overall productivity of a country, one tends to increase either ‘capital’ or ‘labour’. 

A quick lesson in economic history 

Looking back over the centuries, we can see how this has played out. Many centuries ago, most people lived off agriculture, also known as the primary sector. As manufacturing (or the secondary sector) became more widespread, more people moved into these types of jobs and machines were developed that increased the productivity of the agriculture sector. 

These manufacturing machines were expensive and so the sector required investment, or capital, to boost growth. This phase saw the establishment of production lines and increasingly created the notion of higher-skilled jobs. This helped fuel the middle class and, over time, the service-based industry amassed more of the workforce as manufacturing became more efficient. 

One of the most notable sectors that saw this transition is car manufacturing. The industry started the assembly line and, while it still exists, the amount of people employed in this sector has been massively reduced following enormous investment in robotics. Most relevant to the situation today, these changes took a long time to develop.

Increasing capital versus labour

By comparison, for businesses, the pandemic has resulted in a fast-changing environment with enormous supply chain disruptions. Most notably, with the service sector mostly shut down, the manufacturing sector faced a boom in demand. 

However, given the uncertain nature, it was far more efficient to ramp up production using people, or labour, rather than investing in expensive new tools with long lead times. From an accounting perspective, investment in plant and equipment are considered fixed costs while labour is a variable cost given the ability to make staff redundant and reduce your cost base quickly. 

In an uncertain environment, businesses favour increasing their variable cost base while a more sanguine outlook results in greater investment in more efficient production to increase long-term profits. Most of these new technologies require computer chips and the supply of these are still facing long lead times. 

Amazon notably increased its warehouse staff during the pandemic to cope with the explosion in demand, but it is no secret that they have also been investing enormous amounts to automate their fulfilment centres. Over the coming years, this gap between technology and low-skilled labour will close and likely result in jobs being made redundant. The higher wages that companies have had to pay has also changed the wider economics of replacing some staff where computing/automation can bridge the gap. 

The current labour market picture

However, some of the jobs that are in short supply at present might not be so easy to fill. Looking at the closely watched job openings data in the US^[1], we can see evidence of that. 

With an ageing population and following an enormously difficult pandemic, the healthcare sector is facing increasing demand and a shortage of staff. The number of job openings at circa 2 million has barely moved over the past year and it is an area where we could see wage increases move up materially. On the other hand, the demand for domestic accommodation staff is one that could reverse over time if households pare back on leisure expenditure. This sector has been a beneficiary of pandemic savings and easing restrictions across the world could see tourism move elsewhere. 

All in all, the current labour market picture continues to worry central bankers. Over the medium term, the service sector jobs that moved to manufacturing in the pandemic are likely to move back to the service sector given technological advances. A lack of skilled labour in some areas means that solving shortages will take time and these job openings are likely to remain unfilled for some time. 

In the interim, central banks are set to continue on a path to dampen demand in service-based industries, hoping that this cools wage pressures. The lags of the policy (see more here) are difficult to measure so we can expect central bankers and investors to remain dependent on data releases resulting in short-term noise. However, technology still has the power to reshape the labour market over the medium term in ways we won’t be able to predict today.

[1] Bureau of Labor Statistics