What is the reason for Zero Wage Expansion since 1980?
Demographics have become the go-to explanation for all economic problems during the past few decades. The Federal Reserve announced last year that its research division had concluded in a research paper that the world’s shifting demographics, as longer lifespans and reduced birth rates combine to increase the proportion of the aged within western societies, have rendered central banks powerless to raise long term interest rates. This is one of the more extreme examples of demographics blame (it hasn’t stopped policymakers increasing interest rates since publication). The paper argues that the US economy has entered a new normal as an increase in the average age of the population is likely pushing up household savings rates and depressing labor force participation rates, both of which are having an adverse impact on inflation.
One particular statistic in the paper stands out. Specifically, the researchers argue that “demographic factors alone account for a 1.25 percentage point decline in the natural rate of real interest and real gross domestic product growth since 1980”. This claim is interesting because it implies that demographics are responsible for virtually all of the decline in economic growth over the past 35 years and other commonly cited factors such as technology changes in productivity, fiscal and monetary policy have had a fairly insignificant impact.
Zero Wage Expansion - Who or what are to blame?
It seems analysts at Australian investment bank Macquarie disagree with this viewpoint. In a research note published last week, the bank’s analysts pondered why wage growth across developed economies has consistently surprised to the downside, despite tightening labor markets in recent years. But rather than focus on demographics, Macquarie’s analysts instead concentrate on the impact technology has had on labor markets as they believe previous studies have overstated the impact of demographics on labor markets:
“We believe that these views overstate the impact of demographics, as they seem to be rooted in an ‘industrial age’ when productivity, pay scales and labor participation was based on raw ‘physical’ power and accumulation of experience. In the modern era, when AI is gradually replacing IQ, and robots and automation are replacing raw muscle power, the conventional demographic-based analysis is not reflecting the reality of modern service-oriented economies. It also fails cross-time and cross-country comparisons.”
The research note goes on to explain that even if you ignore cultural differences and focus on just four comparable Anglo-Saxon countries, the UK, US, Canada and Australia, US participation rates have declined far more steeply over the past decade despite no demographic differences. What’s more, demographics do not wholly explain differences between countries with younger versus older demographics such as Japan or Germany -- these two countries currently boast historically low unemployment rates and tight labor markets but no evidence of any meaningful buildup of wage or inflationary pressures.
With the lack of meaningful wage growth in full employment economies Japan and Germany, Macquarie’s analysts conclude that the lack of robust wage growth is driven by a combination of “technology and over-financialization rather than just demographics” are to blame for zero wage expansion around the world:
“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…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 over-financialization) eradicate corporate pricing power and destroy conventional labor markets, unleashing deflationary pressures while depressing productivity.”