The End of Cheap Labor

 Labor shortages everywhere. Not only in US, everywhere in the developed world. Lots of blame going around. Some blame COVID-19, some blame politicians. But problem is much deeper, than it appears at the first glance.

First, let's take a look at the US resident population pyramid:

We can see that the biggest age groups are 50 to 60 years old and 20 to 35 years old. Obviously, 50 to 60, that's the tail part of baby boomer generation (older boomers are gradually dying out). 20 to 35 are their children. This is the new labor force coming to market right now.

Overall picture is clear: we don't have any room for labor expansion in US, except immigration. Which is politically unpopular and repressed.

But we also know, that in the last 40 years (if not more) wages stagnated, with exception of the last 7-8 years. And that stagnation was the worst at the lowest level of wages. How do we reconcile those two pieces of information? Simple. Starting beginning of 1980s, China opened to the outside world. Adding almost a billion people to the world labor force. Rich countries moved a lot of production to China, depressing wages at home. But market works both ways. Wages in the rich countries have been depressed, but wages in China grew. 

There are still some potential to tap into cheap labor. There is a fast population growth in Africa. But businesses are reluctant to move production there because of political instability in most countries. And in stable countries, surprise!, population growth is mostly over as well.

There are only two ways to handle the current situation:

1. Permanent stagnation, obviously preferred by some business leaders, who wants hard money policies regardless of economic situation.

2. Policies, increasing labor participation and immigration. Which includes government sponsored child care, more government involvement in healthcare.

Of course, partially labor shortage can be solved by increased productivity, which requires increased investment from businesses. I will believe it when I see it. Last 20 years, most businesses tried to invest into productivity as little as possible. And again, in stagnation situation this won't happen, ever.