As we look around our world today, it’s easy to see many forces changing our economic and social models. We all know technology, income inequality and shifting political movements will create a world different from the one we have lived in for the past few decades. Analyzing each of these issues is difficult enough. Trying to synthesize a unified view of the future that considers and integrates them all is daunting challenge, yet that is exactly what the consultants at Bain have attempted in a recently-published report (Labor 2030: The Collision of Demographics, Automation and Inequality) that makes for fascinating, if not very optimistic, reading.
The horizon of Bain’s analysis is the near future: the year 2030, barely a decade away. In Bain’s opinion, by that point in time the developed world will be in the midst of tremendous social and economic changes. Those changes, Bain thinks, will be the result of three major forces: demographics, automation and income inequality.
As the report notes, the majority of the world’s workforce is aging rapidly, and this wave of older people is going to end the abundance of cheap labor that has driven growth over the past few decades. This shift from a younger to an older population will be a drag on economic growth and present a series of social challenges:
As the total size of the labor force stagnates or declines in many markets, the momentum for economic growth should slow. If it does, governments will face major challenges, including surging healthcare costs, old-age pensions and high debt levels.
It’s impossible to read any major business publication and not see an article about the increasing prowess of “intelligent” machines and robots moving more and more into the work world that humans have heretofore monopolized. The Bain authors don’t see any change to this evolution and posit that its effects will benefit a few and harm many:
The benefits of automation will likely flow to about 20% of workers—primarily highly compensated, highly skilled workers—as well as to the owners of capital. The growing scarcity of highly skilled workers may push their incomes even higher relative to lesser-skilled workers. As a result, automation has the potential to significantly increase income inequality and, by extension, wealth inequality.
Bain believes that the coming wave of automation could eliminate 50% of existing jobs, which is a remarkable idea to even contemplate.
Ever since the extensive debate brought on by Tomas Picketty’s 2014 book, Capital in the 21st Century, the issue of rising income inequality has led many people to wonder about the future of democracies in a world where only a tiny fraction of the population controls most of the income and wealth. Unfortunately, Bain sees this problem as all too real and bound to get worse in the coming decade, especially for the lowest-paid sectors of the workforce.
The only good news for lower-skilled workers in developed nations, if one can see it that way, is that their lowered wages combined with increased wages in developing nations will close the wage gap that drove so much the off-shoring wave in the last few decades.
While this is a trend that will impact most developed nations, the U.S. and China will be especially hard-hit, note the authors. Their inequality levels are already at historic peaks and, worryingly, automation will only make it worse.
After considering extensively both the causes and implications of each of these three broad forces, the authors end their report with a series of recommendations for business leaders to consider and they are worth reproducing here:
Be wary of following market momentum—volatility will increase. The crosscurrents of multiple macroeconomic forces will ebb and flow at different times, making it dangerous to assume that signals indicate stable opportunities. Trends that had longer trajectories up until now, such as falling interest rates or even growth itself, may reverse course far more rapidly than in past decades. Companies can prepare for such shifts by making resiliency a high strategic priority and actively managing and monitoring macro risks.
Middle-class markets are likely to erode. Many consumer-facing businesses design and market goods based on a three-tier household model, including a small upper-income tier, a small lower-income tier and a broad middle-income tier. Pressure on the middle class may favor a primarily two-tier structure, with upper-income households representing roughly 20% and lower-income households making up the remaining 80%. This change would trigger a dramatic shift in the way that companies segment goods and services markets within and across these tiers.
Expect an interest rate speed bump. Interest rates are likely to rebound upward (potentially rapidly) in the next decade before dropping back toward historical lows, making capital management for businesses and capital preservation for investors more challenging. Since the 1950s, interest rates have tended to rise or fall gradually with patterns in one direction or the other, lasting decades. An environment of volatile interest rates would expose companies and investors to a greater risk of being caught with exposures pointing in the wrong direction.
Automation could fuel a 10- to 15-year boom followed by a bust. The next wave of automation investment will create many opportunities but will grow increasingly perilous as it builds momentum. Companies may feel competitive pressure to invest in automation technologies, similar to the way they felt compelled to create global supply chains in the 1990s and 2000s. But to avoid being caught on the wrong side of the investment cycle, businesses and investors will need to pay greater attention to monitoring their risk exposure as the investment cycle progresses.
Highly skilled, high-income labor will grow increasingly scarce. The pace at which displaced workers retrain and migrate toward higher-skilled jobs will likely be too slow to alleviate shortages. The challenge for companies will be attracting, growing and retaining highly skilled talent and maximizing workers’ productivity by rethinking how their businesses are structured.
Baby boomer spending growth will peak in the 2020s before tapering. Compared with previous generations, baby boomers will extend the period of high-income earning and spending by about 10 years. The sheer size of this generation means there are considerable market opportunities for most goods and services, including big-ticket items such as housing and transportation. But growth based on this demographic shift will become more concentrated among the top 20% of households.
More government in more places is likely. Faced with rising inequality, governments are likely to become more interventionist, using higher taxes and regulation to manage market imbalances. Governments may expand their role in the marketplace, similar to what was seen in the West between the end of World War II and the early 1980s, by shifting resources as well as becoming a direct buyer of goods and services.
Intergenerational conflicts will potentially rise, drawing in businesses. As retirees and the working-age population battle for resources, businesses may become indirectly involved. Businesses, management teams and even shareholders may add their voices to the conversation about government transfers as they grapple with existing pension obligations, the scarcity of highly skilled workers, social pressure to address job losses and declining incomes among mid- to low-skilled workers.
After reading the complete report, it’s hard not to end in a generally pessimistic state of mind. The Bain report is an excellent analysis of these major forces and their negative implications for our future. Their time horizon is not in the distant future, and, if the authors are correct in their conclusions, the distressing issues they predict are ones we will all have to experience and confront. The world’s developed workforces are getting older. Automation will take away a large number of jobs that provide people a living today. Income inequality is a serious issue, and technological changes will, on today’s current trajectory, only worsen this phenomenon.
Much credit is due to the Bain team’s thorough exploration of these issues, for their report lays out clearly the challenges today’s social, political and business leaders have to address and hopefully solve. One can only hope that the distractions that currently dominate our headlines in the U.S. come to a close sooner rather than later, so that our own leaders can stop worrying about the noise and start listening to the signals this excellent report sends out to anyone who cares to listen.
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