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  • Karen Harris, Austin Kimson

Labor 2030: The Collision of Demographics, Automation and Inequality


Executive summary

Demographics, automation and inequality have the potential to dramatically reshape our world in the 2020s and beyond. Our analysis shows that the collision of these forces could trigger economic disruption far greater than we have experienced over the past 60 years (see Figure 1). The aim of this report by Bain's Macro Trends Group is to detail how the impact of aging populations, the adoption of new automation technologies and rising inequality will likely combine to give rise to new business risks and opportunities. These gathering forces already pose challenges for businesses and investors. In the next decade, they will combine to create an economic climate of increasing extremes but may also trigger a decade-plus investment boom.

In the US, a new wave of investment in automation could stimulate as much as $8 trillion in incremental investments and abruptly lift interest rates. By the end of the 2020s, automation may eliminate 20% to 25% of current jobs, hitting middle- to low-income workers the hardest. As investments peak and then decline—probably around the end of the 2020s to the start of the 2030s—anemic demand growth is likely to constrain economic expansion, and global interest rates may again test zero percent. Faced with market imbalances and growth-stifling levels of inequality, many societies may reset the government's role in the marketplace.

We call the coming period of upheaval "the Great Transformation" and define it through 10 interlocking themes, including the changing ages and stages of life, the rise of platforms and post-globalization in geopolitics. Our research indicates that the depth and breadth of changes in the 2020s will set apart this transformation from many previous ones.

Introduction

By 2030—little more than a decade from now—the global economy will likely be in the midst of a major transformation. Companies and investors grapple with changing conditions constantly, but our research points to an unusual level of volatility in the decades ahead. To understand why, we look at the three major forces that will shape the 2020s: demographics, automation and inequality. These forces are already in motion and set to collide.

The majority of the world's workforce is aging rapidly. We forecast US labor force growth, for instance, will slow to 0.4% per year in the 2020s (see Figure 2). That major demographic shift is bringing an end to the abundance of labor that has fueled economic growth since the 1970s. Thanks to longer and healthier lives, many people are working well into their 60s and beyond, but the trend toward later retirement is not likely to offset the negative effects of aging populations.

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. On the plus side, the lagging wages of mid- to lower-skilled workers in advanced economies should benefit from the simple economics of greater demand and lesser supply. But demographics is not the only force in motion.

The next phase of automation has begun, and it will accelerate in the years ahead. Faced with a rising scarcity of labor, companies and investors are likely to draw increasingly on automation technologies, which, in turn, would boost productivity. But to grow, economies need demand to match rising output. Our analysis shows automation is likely to push output potential far ahead of demand potential. The rapid spread of automation may eliminate as many as 20% to 25% of current jobs—equivalent to 40 million displaced workers—and depress wage growth for many more workers.

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.

For countries entering the 2020s with a relatively low level of income inequality, where demand growth does not already constrain supply growth, the widening divide may be easier to manage. But the two largest economies in the world—the US and China—have levels of income inequality at or near their historic peaks. Automation will likely further raise inequality.

If automation rolls out slowly, workers who lose their jobs will have more time to adjust, retrain or simply retire out of the workforce. A slow pace would avoid an abrupt spike in investments for newly automated capacity and create a relatively gentle push and pull between the need for more output capacity (due to unfavorable demographics) and more output potential (due to increased automation). In this scenario, the world economy would muddle through the shift to a more automated economy with lackluster growth but also less disruption. But a slow transition flies in the face of data on the quickening pace of technological adoption over the past half century. It assumes a sluggish pace not seen for a hundred years or so, since farming automation triggered the industrialization of the workforce in the West.

By contrast, a moderately more rapid rollout over 10 to 20 years would trigger a massive investment surge, up to an incremental $8 trillion in the US alone, based on our estimates (see Figure 3). Much of the added output potential would be directed back toward meeting investment demand, pushing overall growth rates back up to levels seen in the 1980s and 1990s.

But rapid automation of the US service sector, for example, could eliminate jobs two to three times more rapidly than in previous transformations (see Figure 4). As the investment wave recedes, it may leave in its wake deeply unbalanced economies in which income is concentrated among those most likely to save and invest, not consume. Growth at that point would become deeply demand constrained, exposing the full magnitude of labor market disruption temporarily hidden from view by the investment boom. Over time, the interplay of these three major forces may produce an apparent contradiction—a dramatic surge in output potential that ultimately leads to stagnation.

What happens beyond that potential pivot is open to speculation. Optimists argue that the clear pattern of history is that creating more value with fewer resources has led to rising material wealth and prosperity for centuries. We see no reason to believe that this time will be different—eventually. But the time horizon for our analysis stretches only into the early 2030s, about 15 to 20 years from now. Relieving the imbalances causing the stagnation in that time period means changing the pattern of income distribution somehow, shifting income toward those inclined to spend rather than save. Many options exist, and different countries will choose different paths. But historically, governments confronted with serious economic imbalances often have opted for a more active role in reshaping market-based outcomes.

Our base-case scenario points to a radically changed business environment in the 2020s and beyond. Many large forces will be moving at once. Interest rates, for example, may dart upward during one phase and then fall back toward zero in the next. Some household segments may do fine for a while and then rapidly slip into distress—similar to the experience of the US middle class in the years up to, and right after, the global financial crisis. The impact on any given country will differ based on its distinct economic, social and governmental structures. Similarly, industries will face a different array of challenges based on their particular value chains, labor forces and national governments.

Business leaders, investors and heads of organizations and institutions will need to look beyond traditional targets and goals and develop the ability to adjust to a changing and volatile macroeconomic environment. That may require new performance metrics, planning techniques and even organizational structures.

Adaptability requires agility and speed. But equally important will be the strength to absorb sudden shocks and resilience to missteps and unforeseeable challenges along the way. Leadership teams that start thinking now about shifting resources to build resilience will be better able to navigate the broad arc of the coming transformation and cope with increased volatility as the forces of demographics, automation and inequality collide.

Some key implications follow.

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 worker's 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.

What follows in the body of this report is the extended narrative of the collision of demographics, automation and inequality. How these major macroeconomic trends play out depends on many variables, and their combination and interdependencies add to the complexity of forecasting a likely scenario. Based on deep analysis, Bain's Macro Trends Group constructed an integrated scenario—a base case—for how these many moving parts could come together. We also discuss some alternate possibilities in subsequent chapters, recognizing that technology and innovation have produced unexpected outcomes over the past century. Chapter 6 covers some practical implications for businesses and investors looking to adapt to the volatile macroeconomic environment ahead.


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