, September 27, 2021

Urgent: we need AI to counter labour shortage as baby boomers retire


  •   5 min reads
Urgent: we need AI to counter labour shortage as baby boomers retire

There is a labour shortage, and it is a worldwide problem. The causes are many, but the retirement of the baby boomers means this demographic crisis has legs; we need AI urgently.

Blaming Brexit is too easy. Yes, the UK has an especially pronounced labour shortage partly caused by Brexit, and the immigrant labour supply begins to dry up.

But Brexit is a UK phenomenon; the labour shortage is a global problem.  In the US, a financial research company has been analysing data on telephone calls involving US CEOs and usage of the phrase 'labour shortage' is surging.

There is a labour shortage in Australia and New Zealand, as this headline on Reuters points out,  'Hungary seeks workers from outside EU to ease labour shortage', states Reuters,  'We need people: Berlin's grand reopening hit by labour shortages' headlines the FT ' Harder to attract staff than visitors at Italy's tourist hotspots,' states Reuters, 'The good, the bad and the ugly of Quebec's labour shortage' headlines the Montreal Gazette and finally from Bloomberg: 'Europe heads for a job crunch that could be deeper than the US's'.

The explanations vary; in Australia and New Zealand Covid related politics keeping the countries isolated from immigrant workers is blamed; in the US, Republicans blame too generous unemployment benefit, Democrats say the issue is that wages are too low.

This is not a problem that is going away anytime soon, if ever. And the reason why it is here to stay is simple: demographics— and for starters, with the retirement of the baby boomers.

The baby boomer generation was born between 1946 and 1964. This means the oldest baby boomer is 75; the youngest is 57. Within ten years, the youngest baby boomer will be 67.

The retirement of the baby boomers represents the biggest demographic shock since the Black Death; this impending crisis always did make the Brexit debate over immigration downright stupid — EU immigration was always going to reverse, demographics made it inevitable.

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But even when the baby boomers have all gone from this world, the demographic crisis won't be over — fertility rates are falling across every continent — although the African demographic crisis is still several decades off.

From now on, the ratio of retiring people to working population will rise.

One of the Bank of England's most famous former interest rate-setters and economics professors at the LSE, Charles Goodhart, recently wrote to the FT. He said: "Surely we can expect a much larger than usual surge of retirements during the rest of this year, adding significantly to the tightening of labour markets," and added: "Most forecasting models ignore such (labour) supply shocks, implicitly assuming such supply conditions remain constant."

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The professor is right, but he is especially right because he put his finger on the very point that will fund this retirement.

"Moreover, the current values of their homes, financial assets and bank deposits are at all-time highs."

House prices and the retirement of the baby boomers

According to the UK website Rightmove, the average British home has increased in value by £21,389 so far in 2021.

The surge in house prices, encouraged by Covid related monetary stimulus from Central Banks, has lined the baby boomer generation with unprecedented wealth. No less than one in five baby boomers are now millionaires,  headlines the FT.

For the baby boomer generation, it is the greatest free lunch in history — they can make more money from sitting on the sofa in the homes than they earn than by working.

Covid has accelerated the shift — baby boomers have become used to avoiding rush hour traffic, used to gardening instead of commuting; some respond by working from home, others respond by working on their golf techniques.

QE and the strange relationship

Critics of central bank policy say that massive monetary stimulus including quantitative easing will lead to inflation, but the route from QE to consumer spending is nuanced — it involves lower interest rates driving up house prices, encouraging homeowners to top up mortgages at rock bottom interest rates and in the case of some retiring baby boomers, equity release.

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Too valuable to fail

House prices are clearly over-priced and as working from home and e-commerce frees up real estate, the supply of residential property will surge.

But policymakers dare not let the perfect storm of rising supply and higher prices lead to a housing market crash — the baby boomers reaction will strike a devastating blow to the popularity of any government.

Even so, policymakers can't defeat gravity forever. The wealth tied up in real estate is too valuable to allow to fall, too big to fail, but it will all the same — as companies move into smaller offices and city-centre high streets and shopping malls shed their retail space.

AI has to save us

The labour shortage will lead to higher wages, and workers will spend the extra money they earn. This is potentially an inflationary threat — but don't forget, in Japan, where both the demographic crisis and QE monetary policy is more advanced, deflation has been a more significant threat than inflation.

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And clearly, if house prices were to fall, this would create one mother of a deflation crisis.

But employers will be forced to react to the labour shortwave by looking at ways to increase productivity.

The decade before, Covid saw weak productivity growth as output per hour work barely grew — this was encouraged by the ultra-flexible labour market policymakers supported.

Post-Covid things will be as different as you can imagine.

Employers will have to improve productivity which means they will have to invest in AI and automation technologies such as RPA.

Remote working will also create downward pressure on consumer demand as those who work from home spend less on travel, business shirts, and sandwiches.

Productivity will boom as a result in a way that it hasn't grown for decades.

The labour shortage is here to stay, so is the need for AI and other fourth industrial revolution technologies.

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