There’s a reasonable (and very sensible-sounding) argument that ageing populations combined with some developments in automation are the drivers of the lacklustre wages growth in the developed world.
The argument goes something like this: older, highly skilled workers are dropping out of the workforce. This drags on the total amount earned by workers at the same time as it keeps a lid on the unemployment rate. Add in the automation of some previously manual tasks and a softening in demand and you have an environment where it’s harder for people to demand more money for their work.
Global equity strategists at Macquarie believe this is industrial-age thinking and fails to account for some fundamental changes in how the global economy really works in 2017.
What’s happening is a much more significant transformation of how the world works, driven by technology and decades of “financialisation”, or the use of various policy tools – mainly interest rates – to bring forward demand from the future.
Viktor Shvets and Chetan Seth from Maquarie’s global equity team write in a note to clients (my emphasis added):
We maintain that lack of robust wages response is driven by a combination of technology and over-financialization rather than just demographics. Technology and the ‘internet of things’ are eroding pricing of nearly everything to zero, yielding a world of zero marginal costs and one of almost unlimited scale. While destruction started in retail and services, it is now impacting manufacturing supply chains. At the same time, attempts to keep conventional private sectors alive (via aggressive financialization) leads to ‘zombie companies’ and persistence of overcapacity. In our view, these two forces (technology and overfinancialization) eradicate corporate pricing power and destroy conventional labour markets, unleashing deflationary pressures while depressing productivity. It also explains a spate of M&A and lack of conventional fixed-asset investment.
The consequences, they continue, are being seen in elections around the world, as people turn to the ballot box to express their dismay at the “disintegration of conventional labour markets”.
What are the implications? First … unhappiness with life and its rewards would continue to impact political outcomes. Whether it is electing inexperienced politicians (France, US), collapse of the middle (Neth.) or settling for extremes (Phil, UK, Turkey), we view disintegration of conventional labour markets as the ‘beating heart’ of current geopolitical outcomes. Second, we doubt that even at very low levels of unemployment there would be any signs of wage pressures. Instead, there would be slower growth, ‘gig’ economy style job redesigns and automation.
And there is one, vital final factor:
Third, excess supply of capital and redundant labour implies that cost of capital can never go up, as disinflation rules and risk of ‘finance cloud’ collapse is unacceptably high. The finance beast must be fed or woe betide the real economy. [Central bank] policy errors are the biggest risks.
In other words, the world is trapped in a place where the amounts of capital available roaming the globe after decades of this “financialisation” are so vast that the global financial system needs to be protected through “whatever it takes” measures, or it would lead to cataclysmic implosions of real economies.
Quite a scenario to consider.