Looking Good: Global employment growth in the next decade

 

Macquarie Bank Private Wealth division recently
released a report Forward Thinking:
Global job growth for the next decade  
which is a fascinating piece of research on
job growth around the world. Below is my edited summary of the most
relevant aspects of the 21 page report.

 

The three most significant historical points from the
research are: 

  • Over the last 5 years, the global
    economy has created 100 million jobs  . 
    This is close to the highest level over any 5-year period since
    1998.  The growth is driven by emerging markets.
  • Strong emerging market job growth is
    structural in nature.    The key
     drivers are their stronger population growth, rising urbanisation
    and greater potential for technology ‘catch-up’  
  • China is the world’s largest job
    creator  , as urbanisation
    shifts inland.
 

In summary:

The world economy is not as unhealthy as the
high unemployment rates in the developed world suggest.

   

Despite weaker growth, the research shows
global job growth increased in the last 5 years, with nearly 100 million
new jobs being created. This is actually close to the highest level over
any five year period since 1998. Once again, this highlights that global
employment growth has been relatively strong at a time when many would
likely expect slower growth given weaker global economic growth since
2007. Losses in the G7 countries were more than offset by large gains in
emerging markets.

   

While global employment growth has been
strong over the last 5 years, the gains have not been evenly spread.
Most of the growth has come from emerging markets, particularly China,
but also India, Brazil and Indonesia  . In contrast, many developed
markets have seen declines in employment since 2007 including the USA,
Japan and Spain.

 

Reasons for strong Emerging Markets job
growth:  

  1. Population growth  
    is the key driver of job gains. More people equals more spending. In
    turn, this creates profits and income that funds the demand for
    labour. Countries with strong working age population growth not only
    have faster job growth, but this growth is more resistant to the ebb
    and flow of the business cycle.
    In general, emerging markets are
    the ones with faster population growth.
  2. Urbanisation  
    is another job creation tailwind for emerging markets, as the
    movement of potential workers from rural to urban areas boosts
    productivity, and creates a larger accessible pool of local workers
    and consumers.
  3. Technology catch-up  
    or ‘cross-country convergence’. This is where countries with lower
    income per capita have the advantage of being able to apply the
    already created technologies used in high income countries. This
    catch-up effect boosts productivity, GDP growth and employment.
 

Off-shoring: not all it seems   

Off-shoring was a key driver of the strong
employment growth in emerging markets between 2002 and 2012, as
developed world companies sought to reduce production costs.

 

Off-shoring was most likely a key driver of
the employment losses in US manufacturing over the same period. That
said, after years of one way traffic, there is increasing evidence of
‘re-shoring’ or ‘in-sourcing’. This is where factories that would likely
have been built in China or elsewhere
if constructed in the last decade are now being opened in the USA.

   

Wal-Mart’s plan to in-source US$50b of US-made products over the next 10
years is a key data point. The company is the largest US importer of
containerised goods, accounting for 5% of container imports in 2011.
Wal-Mart is not alone.  There’s a long list of companies that have
indicated plans to build a new US factory, including Apple, Airbus, Dow
Chemical, General Electric. This is supported by a recent survey of US
companies by MIT that found that 33.6% of US companies were considering
re-shoring.

 

Changes in relative labour costs are a key driver of the re-shoring
trend. China’s labour costs in manufacturing rose 20% a year for much of
the past decade, while costs in the US rose 2% a year. Labour is still
cheaper in China, but China’s cost advantage has shrunk.

   

  Assessing the competitiveness of ASEAN
countries relative to China, the Philippines is well positioned to
capture some of the production that moves from China’s higher cost
coastal areas. That said, a key conclusion was that the US is gaining
competitiveness relative to both China and ASEAN countries due to its
lower inflation and the weak US dollar. This highlights the potential
for re-shoring to the USA.

 

A global labour market   

The world’s labour markets have become
increasingly integrated and globalised over the last 20 years. This
trend is expected to continue as smart phones and tablets make it even
easier to keep a global workforce connected using new technologies such
as social media and video conferencing.

 

These technologies make it easier to split
tasks and production between areas and perform work from remote
locations. An NBER paper recently found that the characteristics of
services jobs that are most conducive to being performed remotely are
those that are (i) internet enabled; (ii) have high information contact;
(iii) have no face to face customer contact. This means service jobs
such as business and financial operations, computer and mathematical
occupations, office and admin support, and architecture and engineering
could become more global markets  .

 

A key driver of this trend in the years ahead
will be the information and communication technologies that allow tasks
to be performed remotely and reduce the benefits of co-locating
activities. As these technologies develop and practical applications
become more widespread, it will allow for tasks and jobs to be siphoned
off to the country that can perform the work at the lowest cost and most
efficiently and only increase the pace at which the world moves towards
a more globalised labour market.

 

Rising tertiary education levels in emerging
markets – particularly China and India – relative to many developed
economies should support the move to a more global labour market. This
trend will create an abundant supply of highly skilled workers to
compete for work and supply needed services in these economies and
around the world. Importantly, it also means that the flow of workers
available for low-skilled (or production) work could slow, and with less
available supply this could put upward pressure on wages in low-skill
occupations.

 

Looking towards 2022   

Looking forward, the researchers have made
some very specific predictions.

 

The global economy is forecast to create
22m jobs a year over the next decade  .
Emerging markets with strong annual job growth forecasts are India  
(2.5%), Indonesia   (2.2%), Turkey   (2.2%) and China  
(1.9%). In the developed world, the markets with high forecast job
growth are Australia   (1.5%), USA   (1.4%)and Canada  
(1.1%).

 

The researchers believe the differences in
long term employment growth across countries are driven by three
factors: 

  1. technology catch up by low income
    countries,
  2. demographics, and
  3. the increase in urbanisation.
 

The research shows a strong link between
employment growth and the pace of urbanisation (correlation 55%).
Importantly, 4 of the 5 countries where urbanisation has been the most
rapid, have experienced the fastest employment growth.

 

Looking forward, the countries with the
largest expected increase in urbanisation over the next decade are
China, Vietnam, Thailand and Indonesia.

 

The countries which are expected to see
acceleration in their shift to an urban economy are the Philippines,
Thailand, Egypt, Hungary and India.

   

In summary, China has enough surplus labour
in inland areas to support ongoing high rates of employment growth, and
with technology catch-up, also GDP growth. That said, the pace of growth
will be slower than that seen over the last decade.

   

Australia: population growth   

Strong population growth has been a significant
factor in Australia’s recent economic performance exceeding the
performance of its developed world peers. This expected average annual
population growth rate (1.5%) in the decade ahead will continue to be an
important driver of economic prosperity.

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