Cheap Labour May Soon Be a Thing of the Past

What would happen if the world ran out of cheap labour?  It’s a threat, or an opportunity, depending on your perspective.  But it could happen in our lifetime.  In an earlier post I described how unemployment was low but wages weren’t rising.  If job growth were to continue all around the world, we could soon be surprised that there are few people left on earth who will work for low wages.

In a January 2018 New York Times article from January 2018, the article points to a global economic up-swing.  The reason why the economy is improving is different in every country.  The global economy has been recovering for a decade, since the 2008 recession arising from the sub-prime mortgage fiasco in the U.S.  This time around, the thriving economy is different.  Economists note that because the growth is broad-based, there are fewer star performers.  If any one country slips into a recession, the rest of the global economy could keep things going strong.  The world economy is forecast to grow by 3.9 percent in 2018 and 2019.  This growth includes a lot of developing countries.

However, this may be a house of cards about to come crashing down once you factor in the “Lewis turning point.”  The Lewis turning point describes when a developing country grows enough and creates enough jobs that there is no more surplus labour.  That means that in order for businesses to grow they must offer higher wages than other employers to draw people away, such that economic growth causes wage growth.  Before the turning point, investors grow their businesses taking for granted an unlimited supply of cheap labour.  After this turning point, the country sees notable changes in their society.  People suddenly stop working in the very lowest-paid jobs.  Employers offering benefits and job-permanence develop an edge over the competition.  Workers get picky about where they want to work.

In this interesting article on a website called The Diplomat, researcher Dmitriy Plekhanov looks into the speculation that China’s era of cheap labour has come to an end.  The methods of measurement are complicated and confusing, but in brief:

“No matter which indicators are employed, they all point out that wages have more than doubled since the year 2009. Such a pace of growth obviously has serious implications for the Chinese labor market and its international competitiveness in terms of relative wages.  The pool of cheap labor has definitely dried up.”

These changes narrow the wage gap between Chinese labour and the rest of the world.

There has been an active debate for some time about whether China has reached, or is about to reach, the Lewis turning point.  One paper from 2011 asserted that it had already happened.  Over at the International Monetary Fund a paper in 2013 estimated that the turning point “will emerge between 2020 and 2025.”  The paper notes that demographics will be a major issue.  Due to the aging of the population and their drop in fertility a few decades ago, China’s labour market is now at its peak size and will start to shrink in the near future.

It’s important to consider China in the context of the global economy.  For some time, globalization has been perceived to be a phenomenon of manufacturing job disappearing in the industrialized world and then re-emerging in China.  Yes, there were other low-wage countries to relocate to, but China was the big kahuna.  If this low-wage option disappears for investors, they must suddenly look to other countries with fewer workers.  Switching countries for a second, an article from January 2017 notes that India needs to create 16 million jobs to reach the Lewis turning point.  The article interprets that this is a lot of jobs, but that’s almost nothing in the global scale.  We’re not very far away from both China and India running out of surplus labour.

This means that investors must go farther afield.  The Times article describes a major investment being made in Rwanda, which might have been a no-go zone in years gone by.  In those cases where investors stick with their domestic populations, they need to change their perspective and seriously consider hiring ex-convicts, people with limited education, people with disabilities, and those who have experienced prolonged bouts of unemployment.  Employers can find contractors in the gig economy, but those contractors can also become scarce given that gig workers are part of the labour market.

All around, it is employers themselves that must put on a good show at the selection interview.  So if you ever thought human resources was a support function, think again.  Your competitive pay position, the quality of the employment experience, and the effectiveness of your recruiting function might become critical to business success.  Oh, and by the way …don’t tell the unions.