The future of labour: How macroeconomic forces are changing the world of work and the global economy

Global labor markets are at a critical turning point. Significant structural changes in the coming years are expected to lead to labor shortages, inflation, and negative effects on economic growth.

A new study by PGIM, the global investment manager of Prudential Financial, Inc., explores how major economic forces are impacting the global labor market and economy. The study identifies which industries, regions, and countries will emerge as winners or losers in the future, and what this means for investors.

"Major changes in labor markets were already noticeable before the COVID-19 pandemic," says Shehriyar Antia, Head of Thematic Research at PGIM.

"The combination of a limited labor supply, increasing tensions in the job market, the rise of artificial intelligence, and resistance to globalization will significantly impact global growth and inflation."

The key factors that have a worldwide impact on labor markets:

PGIM identifies four factors in their study that are accelerating structural changes in labor markets:

1. Demographic Trends Changing the Global Workforce

The "double aging" of entrepreneurs and settled employees dampens the willingness for entrepreneurial initiative and innovation. For example, this is leading to a decline in business startups in the USA.

2. Structural Discrepancy Between Labor Supply and Demand

The imbalance between labor supply and demand is being exacerbated by technology, reshoring (the return of manufacturing from developing countries back to industrialized nations), and industrial policy. For instance, the US semiconductor industry expects that more than half of the required positions will remain unfilled by 2030 due to a lack of workers with the technical know-how to manufacture chips.

3. AI Bringing Automation from the Factory Floor to the Office

Work and technology have a complex relationship—they increase productivity while also replacing jobs. AI could potentially displace workers from the labor market in the future, especially in service sectors such as law, finance, pharmaceutical research, and education. However, this displacement won't happen immediately or to the extent suggested by current media reports.

4. Changing Globalization Impacting Labor Structures

The golden age of globalization is over, and a paradigm shift is underway that investors have overlooked. Factors such as migration, the relocation of global supply chains, and the increased bargaining power of employees must be considered by investors, as they have the potential to fundamentally change growth, inflation, and monetary policy in this new era of labor markets.

Taimur Hyat, Chief Operating Officer of PGIM, adds: "Technology and trends like the relocation of supply chains are increasingly leading to an imbalance in labor markets in industrialized countries. This study shows investors where companies can find the skilled workers they need to develop further—this is a crucial factor for long-term investment decisions."

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Challenges for Today's Leaders at the Regional Level

Taimur Hyat adds that the changes in labor markets will produce new winners and losers depending on the industry and region. "For investors, it will be crucial to understand the far-reaching impacts of this new dynamic." In the study, PGIM offers a framework for assessing labor supply, labor quality, and the political environment.

The study concludes that many of today's leading countries will struggle to meet future labor demands. At the same time, countries that might not be expected to are better positioned to take advantage of the changes in the labor market. The findings present the following picture:

Asia

In Asia, China faces a major challenge in meeting its future labor needs. Due to a significant population decline and negative migration balance, China performs poorly in terms of labor supply.

Europe

The largest European economies face challenges, while smaller countries like Sweden and Switzerland are better positioned. Germany, Italy, and Spain will experience significant demographic declines in the coming years, which are unlikely to be offset by current immigration policies. Meanwhile, the Netherlands and Portugal have poor labor supply due to strong demographic decline and negative migration balance.

North, Central, and South America

Current regional leaders Mexico and Brazil will face significant demographic challenges, which are unlikely to be alleviated by current trends in migration or female labor participation. Besides Canada and the USA, Chile and Costa Rica are well-positioned for the new working age.

Africa

While leading African countries like South Africa, Egypt, and Nigeria have favorable demographic trends compared to other regions, they perform poorly in terms of labor quality and the conditions for entrepreneurial activity.

In-Depth Examination of the USA

In collaboration with the Brookings Institution, PGIM also took a closer look at the labor markets of US states and cities. The study reveals that states like Oregon and Wisconsin have the greatest potential to boost local productivity and growth. Cities with major universities, which produce top talent in science and research, are attractive even in states that are not otherwise leading. For example, Mobile, the largest port city in Alabama and the seat of Mobile County, is a hub for highly skilled industries such as aerospace, chemicals, and mechanical engineering.