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.
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:
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.
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.
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:
technology catch up by low income countries,
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.