THE GREAT LABOUR GLUT IS ENDING.

I wrote last time about an important new book by Charles Goodhart, emeritus professor at the London School of Economics, and Manoj Pradhan, founder of Talking Heads Macro. The book is The Great Demographic Reversal: Ageing Societies, Waning Inequality and an Inflation Revival. Their argument is that the world economy of the past few decades was shaped by demographic change and globalization and that demographic change is about to go into reverse — maybe globalization, too. That will have consequences most people haven’t thought about yet.

The big change over the past 40 years was an unprecedented increase in the world’s effective labour supply. Postwar babies reached their productive middle years. The collapse of Soviet communism, the spread of globalization, and successive post- Mao reforms in China gave the world access to hundreds of millions of new workers who were now, in a capitalist cultural revolution, empowered to be productive. In China, in particular, waves of migrants re-enacted North Americans’ trek from the farms to the cities a hundred years earlier.

I wrote last time about Goodhart and Pradhan’s argument that the growing productivity, rising incomes and high savings rates of these now economically liberated legions helped produce a world “savings glut” that kept interest rates low. But the other part of their story is that this glut of labour moderated prices and wages around the world. Many studies have looked at the impact of China’s manufacturing boom on world inflation in the 1990s and 2000s and especially after its entry into the WTO in 2001. Most have concluded that its dampening effect on prices had at least some role in the “Great Moderation” that brought that era’s benign, non-inflationary growth.

The effects on wage-earners in rich countries weren’t necessarily benign, however. They did enjoy the Walmart effect

CHINA’S POPULATION IS AGING. THE CONSTANT FLOW OF NEW WORKERS FROM THE FARMS IS DRYING UP.

of low and even falling prices for consumer manufactures. But — as mainstream international trade theory would have predicted — wage- workers’ jobs and incomes were threatened by the emergence of hundreds of millions of new competitors in poor countries. The greater competition, Goodhart and Pradhan argue, weakened the bargaining power of rich-country workers, eroded the effectiveness and therefore popularity of private- sector unions, and in many places reduced the share of overall output going to labour.

The beneficiaries of this change were the managers and entrepreneurs who could take advantage of these big new supplies of labour, whether by transplanting their own skills to China and other emerging economies or by buying production and jobs offshore. The result, in many rich countries, was a rise in inequality — although other big forces, especially technological change, were also at play.

Donald Trump was hardly the first politician to notice all this. In fact, an interesting question is why in most countries the hit on labour gave rise to right-wing rather than left-wing populism. Goodhart and Pradhan argue that the difference is immigration policy. Left-wing parties, believing in the world brotherhood of workers, favour immigration, thus alienating millions of workers who think it worsens their economic position.

Even our own Erin O’toole, the new Conservative leader, has decided to go populist/protectionist. As he said in a recent speech, “Too much power is in the hands of corporate and financial elites who have been only too happy to outsource jobs abroad. It’s now expected of a shareholder to ask a CEO: ‘ Why are we paying a worker in Oshawa 30 dollars an hour when we could be paying one in China 50 cents an hour?’ “

Of course, if both workers are producing the same value of output in the hour, it is very hard to understand why the Chinese worker shouldn’t get the assignment. But they generally don’t produce the same value. The reason Canadian incomes are higher than Chinese incomes is that, on average, Canadians are more productive than Chinese — not inherently, but because we have more education, work with more capital and live in a society where property rights are more secure.

But China is obviously catching up. In fact, 50- cent- anhour workers may be hard to find there these days. The minimum wage in Shanghai is about US$ 3.30 an hour and the average worker makes four times that. In 2018, for the first time since economic reform began, China’s workforce didn’t grow. Why? We are entering Goodhart and Pradhan’s “great demographic reversal.” China’s population is aging. The constant flow of new workers from the farms is drying up. Wages are therefore rising.

There are lots of things going on in the world economy of course, and many conflicting trends to contend with, but if you buy the argument that the labour glut, especially from China, kept inflation down, weakened unions, reduced labour’s bargaining power, and increased inequality in the rich countries, then it’s all going to go into reverse over the next two or three decades, as labour becomes scarcer. Which means the world will evolve to Mr. O’toole’s current taste whether he’s elected or not.

Unless, that is, India and Africa replenish the labour glut. But for why Goodhart and Pradhan don’t think they will, you’ll have to read their book.