Tomorrow brings the publication of the unemployment figures for August. They are likely to make pretty grim reading. This was the month when the Government made employers contribute to the cost of their furloughed workers and quite a few will probably have used this as a reason to cut jobs. I suspect that the number of unemployed workers will have risen by about 100,000 over the previous month.
Admittedly, Friday’s announcement by the chancellor of further relief for employers caught up in local lockdowns should ease pressure over the coming months. Even so, that won’t stop unemployment from rising substantially. I reckon that towards the end of next year it will probably peak at about 8pc. That means an extra million workers unemployed. And there are many forecasters more pessimistic than me.
While we all have to get to grips with this grim prospect, it is often helpful to lift our sights from the immediate future and look to the decades beyond. To do this meaningfully you have to ignore the things that short-term forecasters worry about and identify major forces that will fundamentally determine long-term economic performance. What lies beyond Covid?
Three weeks ago I wrote about a just-published book by Charles Goodhart and Manoj Pradhan called The Great Demographic Reversal. It is certainly an exercise in big thinking, backed up with data. And it paints a picture radically different from the grim Covid-ravaged economy that we have to face today.
In a nutshell, their thesis is that the last few decades have been dominated by a surge in the global labour force brought about by the combination of rapid growth in the working age population in the west and the integration of China and other countries into the global trading system. In the decades ahead, this is going to change radically. India and Africa are unlikely to be able to “do another China” on the scale required.
Meanwhile, in many countries the normal working age population is set to shrink. It is already falling in Germany and parts of Eastern Europe as well as in Japan and China. The result, they say, is that we will enter a period when labour will become scarce, real wages will be bid up, inequality will fall and inflation will rise.
This is a scenario that you should take very seriously. But it is not the only plausible one. You may think the Goodhart and Pradhan view is optimistic – although it isn’t for all those who will be hit by much higher inflation.
Amid all the Covid-induced gloom, however, I can offer a different ray of optimism. Before the coronavirus struck, commentators and analysts were obsessed about the prospects for robots and Artificial Intelligence bringing another technological revolution. This vision now seems to have faded into the Covid gloom.
Admittedly, there are potential downsides to AI and some commentators dwelt on them. In particular, the real pessimists argued that these technological advances would cause mass unemployment, reduce real wages and widen inequality to such an extent that there could be huge political consequences. Many of them came to support the idea of a Universal Basic Income as a way of trying to head off the worst economic and political dangers. So this was Covid-like gloom before Covid.
Yet, as I argued in my recent book The AI Economy, these dystopian features were by no means inevitable. Moreover, there were some things to get really excited about. Most importantly, AI could potentially bring significant improvements in productivity, including in much of the service sector where productivity growth has tended to be extremely sluggish.
In essence, the advances of robotics and AI would increase our productive potential. It was up to us to decide how much of this should be taken out in the form of increased production and how much in the form of increased leisure.
All this optimism and excitement now seems a world away. But it is still relevant to the future beyond Covid. I am struck by the way that the vision of The Great Demographic Reversal and the AI pessimists are the exact opposite of each other.
The one sees a shortage of labour and the other a surplus. One sees real wages being driven up and inequality reduced and the other sees real wages being driven down and inequality increased. One sees the return of inflation while the other sees the onset of deflation.
Yet the demographic downturn and the widespread adoption of AI could dovetail neatly into each other. Just as the advance of AI destroys jobs so the number of workers available to fill them may drop back as the population ages. Too comfortable to be credible?
Naturally, this adjustment couldn’t happen smoothly. For a start, many of the new jobs in an AI-driven economy will be in the caring sector, as the demographic shift is going to greatly increase the number of people needing such care. Yet over the next couple of decades those people losing their jobs, or not finding jobs in the first place, aren’t necessarily going to be the ones that you would normally associate with providing care to the elderly.
Having said that, serious labour market mismatching may be less of a problem over the next couple of decades than it was during the de-industrialisation of the last couple. The latter saw millions of men employed in manufacturing and other manual occupations lose their jobs while the service sector expanded. It was difficult to retrain a 50 year old unemployed miner to become a call centre operative. But in the west de-industrialisation is now largely complete. In the end, the passage of time and market forces would sort out any mismatching.
In the post-Covid world what happens to the major macro variables – unemployment, real wages, inequality and inflation – may depend critically upon the interplay between demographics and AI. Even in the current dark days I remain optimistic.
Roger Bootle is chairman of Capital Economics