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Global Perspectives
Where have all the people gone?
Several years ago, in this Global Perspectives blog, we identified the potential for the global impacts of demographic change. Two decades of globalisation have brought immense gains to developed and developing markets in lower manufacturing costs, leading to super-low inflation. Now that globalisation is unwinding, the cost of business and labour is rising across the developed economies, reigniting inflationary trends.
In this new world of people shortages and supply chain disruption, labour and trade unions will hold increased power with potentially adverse inflationary impacts. Just as the Western world has benefitted from globalisation, it will suffer due to deglobalisation and a fracturing of global trade, especially in sensitive industries. With population growth rates peaking and fertility rates in freefall, the developed world faces the prospect of acute labour shortages, cost of living pressures, and stubbornly high interest rates. Absent any other factors, it has been estimated that GDP per capita could fall by as much as 25% in the 21st century.
The New Reality of Labour Shortages
Labour shortages and disrupted supply chains are redefining economic realities, amplifying the bargaining power of labour and trade unions. This shift could further exacerbate wage inflation, leading to higher prices. The Western world, which once thrived on the efficiencies of globalisation, now confronts the challenges of deglobalisation and fragmented trade networks, especially in critical industries.
The Demographic Shift and Its Economic Impact
According to projections by the United Nations, the global population over 60 will more than double by 2050, exceeding two billion. At the same time, the global population of young people aged 15-24 is expected to decrease by 7%. Countries like Japan face acute demographic declines, with an anticipated 28% population reduction by 2060.
The International Monetary Fund (IMF) warns that ageing populations will likely slow productivity and economic growth. Their forecasts indicate that population ageing could reduce potential output growth by approximately 0.5 percentage points annually in advanced economies over the next three decades.
Recent research by McKinsey & Company reveals that labour markets in advanced economies are among the tightest in two decades. This trend reflects long-term demographic shifts rather than a temporary pandemic-related anomaly. McKinsey estimates that GDP in 2023 could have been 0.5% to 1.5% higher if excess job vacancies had been filled.
Addressing Labour Market Challenges
Economists Charles Goodhart and Manoj Pradhan emphasise that "the age of cheap labour is over, and the age of expensive labour is beginning." This transition will reshape labour markets, with workers taking a more assertive role, altering the dynamics between labour, business, and capital.
To mitigate labour shortages, some countries are implementing innovative solutions. For instance, Germany's' chance card' system enables skilled migrants to accumulate vocational points, addressing an expected shortfall of seven million workers by 2035. Hong Kong, Singapore and Japan are all introducing reforms to make immigration by skilled workers more attractive.
That said, recent developments in Europe have signalled a resurgence of more right-of-centre anti-immigration parties in countries such as France, where youth unemployment is high. A measured approach is needed to reflect prevailing conditions. Still, there is a widespread shortage of people and labour, but not everywhere.
Opportunities Amid Demographic Changes
While demographic shifts present challenges, they also open significant opportunities for private capital investment. An ageing population will drive increased demand for healthcare and medical services, providing growth prospects for healthcare providers, researchers, pharmaceutical companies, and IT professionals. Innovations like robotic exoskeletons and remote health monitoring systems are emerging to support ageing populations, particularly in countries like Japan.
Artificial intelligence (AI) is revolutionising healthcare by enhancing diagnostic accuracy and risk prediction by analysing medical images, patient records, and genetic data. AI-driven personalised medicine offers tailored treatment plans, improving outcomes and reducing side effects.
Countries, both developed and developing, are increasingly embracing automation. Technologies like artificial intelligence, robotics, and the industrial Internet of Things (IIoT) are revolutionising manufacturing processes. By 2025, these technologies are projected to create at least 12 million more jobs than they eliminate.
According to the US Census Bureau, manufacturing firms in Connecticut have taken innovative steps to retain older workers. They organise high school apprenticeship programmes, open houses, and fast-track training at local colleges. Leveraging technology, seniors can adapt to changing job requirements. Digital literacy and remote work capabilities are crucial.
Fostering Innovation and Entrepreneurship
Demographic shifts generate new demands for goods and services, creating fertile ground for innovation and entrepreneurship. Companies anticipating and adapting to these changes will be well-positioned to capture new markets and drive growth. This trend is evident in the later life care sector, where Europe-wide personnel shortages are being addressed through private investment.
In Sweden, the government collaborates with local business associations and vocational schools to offer tailored entrepreneurship courses for seniors. These programmes cover business planning, marketing, financial management, and digital skills. Seniors who complete the training are better equipped to start and manage their ventures.
In Canada, policymakers have adjusted tax regulations to provide tax breaks for seniors who invest in their businesses. Reducing the financial burden motivates seniors to explore entrepreneurial opportunities. Social security systems have also been modified to allow partial benefits while continuing self-employment.
Thoughtful policies can empower seniors to embrace entrepreneurship, contribute to the economy, and lead fulfilling lives beyond retirement. Retaining older workers in the workforce facilitates intergenerational knowledge transfer, boosting the skills and productivity of younger workers.
Societal and Economic Impacts
Ageing populations will likely shift social norms and values, fostering greater social cohesion and civic engagement. Post-retirement, older individuals may become more active in their communities, advocating for social and environmental causes.
A Deloitte report projects that global spending by seniors will increase by 76% between 2015 and 2030, reaching $15 trillion. Key spending areas include healthcare, housing, and transportation. Seniors with more discretionary income are expected to spend more on leisure and travel. European countries like Italy and Spain are positioned as prime destinations for relocation and for older travellers seeking cultural experiences and relaxation.
Strategic Recommendations for Companies and Policymakers
To address labour shortages and enhance productivity, McKinsey recommends several strategies for companies and policymakers:
- Focus on Skilling and Reskilling: Attract talent from non-traditional pools, offer more flexible work arrangements, and promote internal mobility.
- Integrate Foreign-born Workers: Develop programmes to incorporate foreign-born workers into the workforce effectively.
- Revise Retirement Policies: Provide eldercare and childcare support to encourage extended work life and attract more women into the workforce.
- Invest in AI and Automation: Prioritise investments in technologies that complement and substitute labour, thereby enhancing productivity.
The Role of Small State International Financial Centres (IFCs)
Small-state IFCs face unique challenges with smaller populations but possess significant opportunities to respond to demographic changes. These centres can leverage their flexibility and agility to implement innovative policies swiftly. Small state IFCs should:
- Adopt Flexible Immigration Policies: Attract skilled workers through targeted immigration strategies that address specific labour shortages.
- Promote Age-Inclusive Workplaces: Foster environments that maximise the contributions of older workers.
- Encourage Lifelong Learning: Implement comprehensive lifelong learning programmes to help the workforce adapt to new technologies and market demands.
- Invest in High-Tech Industries: Focus on high-tech and financial sectors, attracting global talent and fostering innovation through favourable regulatory environments.
By understanding and addressing the implications of demographic changes, countries and small-state IFCs can better prepare for the future, capitalise on emerging opportunities, and promote sustainable economic growth and prosperity.
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Global Perspectives provides regular, on-point commentary on relevant topics in a pithy and accessible way. Our observations and points of view are based on listening hard to clients global needs, priorities and concerns. We draw on insights from every area of our business and collaborate to deliver this global thinking; something that clients tell us is distinctive and sets us apart. If you'd like to find out more, please get in touch.
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