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How Our World Is Actually Changing
28 Oct 2021
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CATEGORIES: Insights

Lampedusa's aphorism that “everything must change for everything to stay the same" is well known.  We often analyse the changes that take place in the world around us. Government, currency fluctuations, interest rates… However, we seldom emphasise the changes that have been under way for decades and that are ultimately much more decisive. We are referring here to structural changes. Let us focus on some which, in my opinion, have been shaping the world for some time, yet are often not talked about.

First: The share of wages on GDP has been declining since the 1970s, while the share of corporate profits is rising.  The reasons are complex.  Namely, (1) baby boomers massively joined the workforce over that decade, so with greater supply, lower employee bargaining power; (2) mass robotisation of industrial plants, which shrunk the number of well-paid jobs in a sector that then accounted for one third of GPD; (3) greater wage dispersion stemming from labour requirements associated to the fourth industrial revolution; and (4) job relocation towards emerging countries, a process which intensified since the 1990s.  Workers have lost bargaining power as a result, and the Phillips curve, which measures the relationship between inflation and unemployment ―traditionally, the lower the joblessness rate, the higher the worker’s bargaining power and wages, and therefore, inflation ― is broken.  For the record, it is not my intention to demonise this first change (wages over GDP), as it has also had a number of positive effects. Among others, the large-scale eradication of extreme poverty (some 40 million people per year since 1990, the largest reduction in history), and the fact that Western consumers have benefited from a much more competitive supply of goods at much more competitive prices.

Second: Labour productivity has been growing at a meagre rate for the last 40 years. “Productivity isn't everything, but in the long run, it's almost everything” is a popular saying.  The reason is that higher productivity rates allow for higher wages without generating inflation. Productivity makes companies more competitive and makes it easier for top-paid workers to reduce their working hours.  For example, output per hour worked in Germany nears 50 euros; in Spain, 40. Similarly, German employees work 1,300 hours per year; Spaniards, some 1,600.  Many years ago, Germans used to work 1,700 hours, but they decided to cut them to enjoy their high earnings.  Therefore, if labour productivity grew at rates close to 3% in the aftermath of WWII, these gains were less than halved since the mid-1970s.  The fallout is twofold: poorer economic expansion in our countries, and it will take them longer to double the level of per capita income.

Third: World demographics have undergone a resounding change brought about by the historical drop in birth rates.  This was spearheaded by Western countries, and emerging ones followed suit.  As such, a country like Brazil, which had fertility rates of six children per woman in the 1960s, now stands at 1.7, well below the replacement rate (2.1). Globally, this rate has been falling rapidly, which has a relevant implication: the world's population, currently around 7.7 billion, will peak soon (we may never reach 10 billion) and then start to shrink.  It will be the first global population reduction not due to plagues or wars. The upside is that the need for energy consumption is reduced, but the downside is that it will be harder to finance many welfare-state structures, starting with pensions. Moreover, the fact that we are gradually disappearing will mean even less economic growth, something Japan is well aware of.

Fourth: Short- and long-term rates have undergone an unprecedented contraction since the early 1980s.  The reasons are, among others, (a) a structural reduction of inflation, (b) the perception that it can be forecasted and controlled (reined in), (c) lower economic growth, and (d) population ageing and rising inequality, factors which have pushed the savings rate up, depressing natural interest rates.  There are records of interest rates dating back to when the Sumerians invented writing in 3200 BC, so we can state that today we have the lowest interest rates of the last 5,000 years.  Covid-19 has stressed some of the changes exposed herein.  However, I would like to highlight the change of changes we should monitor: (a) the weight of wages on GDP may have started to rise, according to the latest US data, partly due to the massive retirement of baby boomers, which may have reversed the bargaining power dynamics between companies and workers, triggering a ‘war for talent"; (b) labour productivity is showing positive surprises, at least in the US, where it is already growing by 2%: it may be that the fruits of large investments in technology in recent years are being reaped; and (c) interest rates are likely to remain low, but the combination of unprecedented non-warlike fiscal and monetary policies will no longer allow us to estimate future inflation, so we could witness major surprises in inflation data and therefore in interest rates. Perhaps today Lampedusa would write "everything must change so that everything changes".

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