The invention of the spinning jenny in 1764 upended the textile industry—and the women who earned a living weaving cotton and preparing fabrics in their homes. Suddenly, these jobs became obsolete. Just as the industrial revolution had a profound impact on how people worked and lived, structural forces are transforming global labor markets today, from slowing globalization to the advent of generative AI. The evolution of labor markets is poised to reshape the macro landscape in the years to come, posing broad implications across the investment portfolio.
In this episode of PGIM’s The OUTThinking Investor, we talk to three experts about the transformation of labor markets, the economic impact, and how investors can identify leaders and laggards as the world embarks on a new era of work. Our guests are Greg Wright, an associate professor of economics at the University of California at Merced and a senior fellow at the Brookings Institution; Zeynep Ton, a professor at MIT Sloan and author of the book The Case for Good Jobs: How Great Companies Bring Dignity, Pay and Meaning to Everyone’s Work; and Jakob Wilhelmus, Director of Thematic Research at PGIM.
For more on this topic, visit PGIM.com to explore our Megatrends report, The Transformation of Labor Markets: Winners and Losers in a New Era.
Episode Transcript
>> Until the middle of the 1700s, the textile industry in Britain employed many women to spin, weave, and dye materials into fabrics. It became known as a cottage industry, as women did this work at home in their small cottages. All of this changed in 1764 when James Hargreaves invented the spinning jenny. This early machine automated the spinning, drawing, and twisting of cotton and wool to produce yarn, dramatically cutting back on the labor required of the women who counted on their earnings to support their family. The Industrial Revolution spread across Britain, then the US, and eventually other countries. Industrialization had a profound impact on how people worked and lived. Working conditions were harsh and often dangerous, but jobs were plentiful and pay was relatively high. It was a true revolution, affecting all aspects of life. Nearly 300 years later, we may be going through another big shift in the labor force. The global pandemic has impacted work for virtually everyone, across job functions, across industries, and across countries. But it's uncertain which changes are temporary and which will be longer lasting. On top of this, the growing use of artificial intelligence could also affect labor in significant ways. And like the early Industrial Revolution in Britain, women could be disproportionately affected. According to a recent study by Revelio Labs, seven out of 10 workers in jobs exposed to artificial intelligence are women. Then there are the rapid demographic changes happening around the world and how an aging population will impact the workforce. What are the key things to know about recent labor trends? Can we apply any insights into labor trends to better understand the economic environment and investment opportunities? And what can firms do to improve their competitive position as current trends continue to unfold? To understand today's investment landscape, it's important to know how we got here. This is the OUTThinking Investor, a podcast from PGIM that examines the past, the present-day opportunities, and the future possibilities across global capital markets. In this episode, three experts share their views on longer-term labor trends and the potential consequences of these trends. Greg Wright is Associate Professor of Economics at the University of California at Merced, and a Senior Fellow at the Brookings Institution. Zeynep Ton is Professor of the Practice, Operations Management at MIT Sloan, and author of the book, The Case for Good Jobs: How Great Companies Bring Dignity, Pay, and Meaning to Everyone's Work. Jakob Wilhelmus is PGIM's Director of Thematic Research. The labor market has experienced significant changes over the past few years. But how do we know whether these changes are mostly in response to the global pandemic and ultimately short-lived? Or are they expected to become ingrained and the shape of things to come? According to Greg Wright, "We should pay attention to what persists and what does not."
>> We can look back historically and think about what type of events have led to persistent economic changes and what type of events have led to short-run changes and that can kind of inform what we think will be the case post-pandemic. But a big lesson from previous economic crises, like the pandemic, is that -- usually, what happens is that these crises accelerate existing trends, and in some ways, they vastly accelerate these trends.
>> The pandemic shed light on what it means to be an essential worker and it changed how we think of these workers. Zeynep Ton explains.
>> The global pandemic reminded us that low-wage jobs that we have been calling unskilled are essential jobs for the functioning of our economy, right? We started calling retail workers, nursing home workers, distribution workers essential workers because they are so essential to the functioning of our economy and their jobs became harder, right? It became more complicated. So the pandemic helped us understand the critical role these employees play in our economy and their importance for our economy.
>> PGIM's Jakob Wilhelmus distinguishes between changes in the way we work and changes in the labor force, overall.
>> The pandemic has dramatically changed how we work, but it really hasn't altered the structural supply and demand of labor. And so most of the effects of COVID have turned out to be cyclical and short-lived when compared to the structural forces such as technology and shrinking populations that are really creating long-lasting mismatches between labor supply and demand. And it really is that imbalance between the supply and demand of labor that is reshaping labor markets and economic outcomes going forward. On the one hand, there is the cyclical effect from work from home, which without doubt has impacted all of us, but is already receding. It hasn't really changed the work we can and are doing. And then on the other hand, there is a shrinking workforce, which is a structural mismatch that is becoming a reality in most countries and has big structural implication as it creates labor market mismatches that will impact wages, productivity, as well as economic growth.
>> PGIM's Megatrends research into longer-term labor trends identifies three major drivers, including demographics, labor mismatches, and technology. Demographics seem to be an obvious indicator of future workforce issues. If we know today's birth rate, we should have a pretty good idea of what the workforce will look like in 20 years. But unexpected events can disrupt this relationship. The pandemic showed this to be true. One demographic factor we can be confident about is that today's wealthier countries are generally aging at a much faster rate than poorer countries.
>> There are three major forces remaking the global economy, and that is demographics, labor mismatches, and technology. Regarding demographics, while the global population is set to grow by 2 billion, from 8 billion today to 10 billion by 2050, it really is a tale of two scenarios. Most economies around the world from South America and Europe all the way to Asia and North America are looking at a demographic turning point of a population that is not only aging but also shrinking, meaning that not only is the share of the older population growing, but there are less people aging into the workforce, leading to a decrease in labor supply. In fact, of the 30 economies with the highest GDP today, almost 90% are facing a decline in their workforce by [inaudible]. That in turn will create a set of macroeconomic challenges, from wage pressure to fiscal strain, that are amplified by the fact that this is a global phenomenon happening almost everywhere at once. And that brings us to the second point, which is really that the global statistics of a growing population is really driven by two regions that have the potential to benefit from a still young and growing population, namely South Asia and Sub-Saharan Africa. And here, the challenge is that demographics alone does not guarantee economic growth, and many of the countries in these two regions lack the high levels of human capital and institutions that are needed to unlock the economic prosperity that can come from a growing workforce.
>> The differences are startling. For example, the median age across Africa is currently 19, while the median age in Japan is now 49. This matters greatly when you look at macroeconomic consequences.
>> No matter what weight you place on demographics, I think you can sort of agree that this is going to be incredibly important. And so you know, on the one hand, the rich countries are aging. What does that mean? Well, it means that, you know, there are increasingly large percentage of the population that are drawing down from the government revenues, and there are increasingly small share of people that are contributing revenues to the government at the same time. So you know, this type of inverted pyramid is problematic.
>> The second major driver PGIM identified of long-term labor trends is the labor mismatch within and across markets.
>> So stories of missing workers have grown exponentially over the last couple years. Yet, there's a crucial difference between the short-term cyclical shortages, such as the current lack of truck drivers or agricultural workers, which oftentimes news and media outlets too often confuse with the actual mismatches that are [inaudible] by imbalances from shifts in the supply and demand for workers. And these structural mismatches are to a large degree driven by economic growth, technological advancements, and the resurgence of industrial policy in the form of near and reshoring. And these mismatches are happening everywhere.
>> China, for example, educates many of the world's STEM workers. We know these workers are crucial for new economy jobs, but today, unemployment of its younger generation is close to 20% compared with the roughly 5% rate of other countries. This younger generation is mostly overeducated for China's economy, which is largely driven by manufacturing. Other big labor market mismatches in the US and Europe are showing up among electricians and other technicians. This was amplified by the trend of nearshoring, aging populations, and the fact that these careers have become less attractive. Big labor market mismatches could intensify as countries increasingly compete for talent. The third major force of labor trends is technology, which has a long and complex relationship with labor. There are two important points that investors should consider about how technology affects labor trends.
>> Technology really changes work more than it replaces it. And so over the past centuries, we have seen that each technological paradigm shift has followed a very similar pattern, where technology has allowed us to replace some of the more repetitive or manual tasks, which then in turn increased our productivity, created new skills as well as new roles. And then second, AI really has expanded from the factory floor to offices and high rises, transforming legal offices, administrative services, and hedge funds. And so what is different this time, and in part responsible for the alarming media headlines and the hype, is the fact that the capabilities of AI and natural language processing are able to replace tasks, not only in the mechanical world but also in the cognitive realm of professionals services.
>> Just as with any other innovation, whether artificial intelligence improves jobs or eliminates them depends on how it's used.
>> If our mindset is let's use technologies to create value for customer and to improve the jobs of the frontline employees, then AI and new technologies are a great enabler of that. However, if the mindset is, well, people are just a cost to be minimized, and we're going to use technology to replace labor costs as much as we can, then those new technologies will be a substitute for labor. They won't necessarily improve productivity, and they won't necessarily improve the customer experience.
>> Productivity and customer experience is key for Zeynep Ton. Much of her work has focused on an approach she calls the good job strategy.
>> The good job strategy is the choices the companies make to be able to make their employees a lot more productive and to enable their employees to deliver better value for their customers. For example, one of the companies that's a good jobs company is Costco. Their wages at a typical retailer is $16 an hour, at Costco, it's $26 an hour. And Costco offers the same low prices and makes a lot of money. How are they able to do that? Well, Costco designed their system for high productivity. For example, they don't offer their customers everything. They simplify their processes. They empower their employees to make decisions. They cross-train their employees so they're able to do multiple tasks. So these are all the elements of designing the work for high productivity, which enables Costco to offer their employees much better jobs, their customers low prices.
>> Perspective is key here. These companies look at labor not as a cost, but as a resource.
>> For decades, we've taught business leaders that labor is just another cost, and lean and mean is what drives efficiency. And because labor is just another cost, market pay is the right pay, even if it's not a living wage, even if market pay drives a lot of employee turnover. And we have created an environment where leaders can't even imagine operating differently. And one of the things that prevents people from imagining is our reliance on making decisions, oftentimes, looking at historical data and looking at different effects in isolation. Now, good job strategy is a system. It's not just higher pay. It's not just higher investment in people. It's about designing the work for high productivity and high contribution. So the elements of the system need to be considered together. So if a company is used to making decisions on what is the return on investment for this particular investment, all else being equal, they'll never get there, right? The companies that have been able to adapt a good job strategy during the last couple of years have been customer-centric. They've asked, "What does it take to win with our customers?" Well, it takes a strong team that's set up to succeed. That means we can't afford to operate with high turnover.
>> Unhappy workers may be even more likely to leave today than in the past when the labor market was not as tight and there was less certainty that the next job was just around the corner. Direct and indirect costs of turnover are significant.
>> One of the costs is direct turnover costs, the cost to hire, onboard, train, time to full productivity. We have seen in organizations that we have worked with, they tend to change their entire roster every year. They have about 100% turnover in frontline services industries. I'm thinking about, you know, call centers, retail stores, restaurant chains, nursing homes, even. And those turnover costs alone tend to be about 10 to 25% of overall payroll dollars that these companies spend. So the turnover costs alone can be significant, but that's the smallest cost of high turnover. The bigger cost is the cost of lost sales, the cost of mistakes, the cost of low productivity, the cost of people having to redo things. And those costs are much bigger than a direct turnover cost. The biggest cost associated with low pay and high turnover is competitive, inability to differentiate in the eyes of customers and inability to adapt to changes because you don't have a motivated, engaged workforce that's set up to succeed.
>> Regardless of the firm's approach to managing its labor force, broader macroeconomic forces are impacting and being impacted by labor trends. Should we watch for anything different this time compared with past economic cycles?
>> We believe that most countries will have an inflationary experience very unlike Japan's disinflationary scenario. And so one big concern we have is that too many investors are still considering Japan as a template of what an aging population means. But Japan really was an outlier that happened under unique circumstances that cannot be replicated by countries facing the same issues today for one key reason. And that is that Japan decided against immigration and instead opted to outsource its productive capacity to other countries. And here, it's really important to remember that it did so during the heights of the era of abundant labor and the push towards global supply chains and just-in-time production. But countries today are facing a very different reality where labor worldwide is becoming scarce and concerns around national security have curbed the enthusiasm around a global supply chain focused solely on cost optimization. So rather than being a prime example, this inflationary experience of Japan is really a distraction from what is a set of inflationary impulses that would transform the macroeconomic underpinnings of the global economy.
>> What should investors focus on in trying to identify companies that are well-placed to manage through these labor force dynamics? Perhaps, less on asset allocation than on country allocation. Demographics are not destiny. Public policy matters a lot in how a country adjusts to a declining working-age population. PGIM has a framework that can be used as a starting point for evaluating this, including these three key criteria: Labor supply, labor quality, and policy environment.
>> First, there is labor supply or the current as well as future demographic outlook. And here, the idea is not only to capture how fast a country's population is declining, but also if there are other opportunities and actions to increase labor supply. One obvious solution would be immigration, but then another one is female participation rates, which are still too low in many countries across. The second factor is labor quality, which really gives investors an overview of the potential mismatches between the required job skills and those offered by the workforce. And that is something we are all seeing right now with onshoring and the push to renewables and their struggle to find enough workers. Last but not least, a country's policy environment captures factors that allow a qualified workforce to create economic growth. And that ranges from the educational system to good institutions, all the way to the capability of attracting global talent.
>> Which countries in particular are well positioned for the changing labor dynamics?
>> Our framework suggests that countries such as Canada, Switzerland, the United Arab Emirates, or Singapore have made policy choices that will help them adjust to this new era of labor. And most critically, those policies are around immigration and participation rates, which are essential to offset inflationary pressures.
>> The model, I think, in many ways is Germany and there are other Western European countries that have done a good job of investing heavily in alternative career tracks for workers, apprenticeships, these type of things that can kind of ensure that a lot of these workers in these dead-end jobs can find pathways out and up. And it's not -- it's not easy in the US, and other countries have found better ways of doing this. But right now is a great opportunity to be doing this because labor markets are tight, because bargaining power has shifted, and because at the same time, we have massive industrial policy ongoing.
>> The motivation and impact of industrial policy relates back to an earlier point on market mismatches.
>> One thing we've seen in many countries that are advanced is overeducation. So a big part of the workforce basically has a level of education that is not required for the job that they end up in. And so that's one of those imbalances between labor supply and demand, where it's really sort of, you have -- like in China, you have all of these graduates who are STEM, which everybody in the world is always fuzzing about that those are the ones that are missing, but it's not really the kind of worker or labor supply that is needed for their economy. And you have that everywhere. And so there's definitely a lag between identifying your workforce needs and being able to supply that need or fill that gap that is -- that is created.
>> Related to this is the industrial policy factor.
>> Industrial policy sort of really accelerates all of these issues. It's creating more jobs on a global scale. So by onshoring semiconductors, you're basically replicating what exists somewhere else, but that then means you need that workforce that you didn't have before. And you need it really, really quick because everybody wants to basically ramp up their production of semiconductors over a few years, whereas normally that just takes longer time.
>> Artificial intelligence is a good example of how investors would be wise to aim to distinguish short-term or tactical trends from longer-term or strategic initiatives, along with the direct and indirect impacts.
>> One major risk for investors is always to get swept away by the immediate hype. And when it comes to the new era of labor, that hype has really been built around AI in the form of natural language processing. That does not mean that we're not convinced that natural language processing will be transformative, but it is too early to be sure who exactly will turn out to be a winner. And so for investors that need to allocate money right now, the infrastructure that is needed to run those services and underlying models are way more attractive than the applications. And to be more specific, that means investment in data centers, both providers and real estate, as well as chip manufacturers that have moved to the center of global industrial policy.
>> Looking at the bigger picture, is the impact of a declining workforce on macroeconomic output and firms' production.
>> When it comes to increasing production, firms only have two options. Either you increase the productivity of your current workforce or you find new sources of labor. But we already know that labor supply is going to be more competitive and therefore more costly. And this in turn will cut deep into margins, particularly for sectors whose labor costs are a large share of their expenses, making it essential to increase labor productivity of the current workforce for every firm in every industry. And the takeaway for investors is that the new AI developments will only increase the gap in premium between companies that are able to retain skills and adopt tech to increase their workers' productivity compared to those that don't. And that goes for both industries of the future, such as renewables or chip manufacturers, who will struggle to find the talent and fill the jobs needed to substantiate growth, as well as the declining industries such as old media and communication or basic manufacturing. We need to incorporate new technology around AI and natural language processing to be viable and competitive going forward.
>> Investors may look to overweight certain countries to benefit from their competitive advantage in labor trends. Can firms do the same thing?
>> There's so much a company or firm can do when it comes to the workforce and labor. And so a lot of the issues really end up on the country level. So it's very much about the policies of a country and their approach to immigration, to the ease of talent migrating to the country and the training opportunities. And all of those policy choices in the end will matter as much as the decision a firm can take for itself. In part, you're limited to your domestic workforce. And then the other option is really just outsource your production if you cannot find the workforce in your locale. So it is a mix of both, right? Like, you really need the firm to realize the change that is going on, but you also need the country to realize the same thing and position it well, because it's really everybody is competing for the same talent on a global scale.
>> Certainly, the impact of globalization is a major difference when we compare current labor market changes with those of the Industrial Revolution. But no matter the time period, the way we see labor and changes to the labor market influences our views of growth and prosperity. Thanks to our experts, Greg Wright, Zeynep Ton, and Jakob Wilhelmus, for their insights on labor trends. To learn more about PGIM's megatrends research on the transformation of labor markets, click the link in the show notes.