Over the last 40 years, wages among most U.S. workers have stagnated, and the gap between the lowest and highest paid has widened. Why?
Economists usually point to the role of globalization, technology and political factors like the weakness of unions and favorable taxes for the rich. But, in a new note, Morgan Stanley offers a more sweeping reason—a sort of uber-explanation, if you will. Economists Charles Goodhart, Manoj Pradhan, and Pratyancha Pardeshi argue demographics is the main cause of inequality—particularly, the effect of millions of Chinese and East European workers entering the global labor market in the last 20 years. It was this “labor supply shock” that kept wages low in advanced countries, allowed inflation and interest rates to fall, and privileged people who could borrow money and afford higher asset prices (like houses).
So now we know. Happily, though, the opposite is also true, according to the analysis: The same forces that pushed inequality to grow could now be about to reverse, causing a return to higher wage growth and, in turn, more equality.
“Just as a larger labor force pushed real wages lower and inequality much higher in the advanced economies, a smaller labor force will inevitably lead to rising wages, a larger share of income for labor and a decline in inequality,” the paper says.
The note says labor will be scarcer in the future because there will be more older people and more workers will be doing healthcare jobs (rather than say manufacturing cars). At the same time, China and Eastern Europe—which have older demographics than other emerging regions—will produce fewer people of working age and have more “dependents” of their own.
“If these global demographic trends … drove inequality higher, then their reversal could lower inequality too,” the paper says. “Rising wages will mean a larger share of national output for labour and falling inequality within economies.”
There’s just a couple of problems with the argument. One, it discounts the predictions of global population growth going forward. China and Eastern Europe may have less labor to offer. But India and Africa, which have growing working age populations, will be able to take up slack. The economists get around this by saying neither has the “administrative infrastructure” to be China or Poland.
Second, the paper says nothing about automation and robots. It expects labor to become more valuable relatively and for wages to raise, but doesn’t mention that employers are simply likely to do without humans for lots of things. “We remain agnostic on the future of innovation since it is both hard to predict and hard to capture in the data,” is all they can say.
“[Thomas] Piketty is history, not the ineluctable future,” the paper says, countering the newly-influential French economist. But that’s only if we believe demographics are always more important than technology and politics. They’re not.