Do Wages Benefit From A Shrinking Labour Force?

Dean Baker says yes:

The retirement of the baby boom cohorts means that the country’s labor force is likely to be growing far more slowly in the decades ahead than it did in prior decades. The United States is not alone in facing this situation. The rate of growth of the workforce has slowed or even turned negative in almost every wealthy country. Japan leads the way, with a workforce that has been shrinking in size for more than a decade.

Baker concludes:

With a stagnant or declining labor force, workers will have their choice of jobs. It is unlikely that they will want to work as custodians or dishwashers for $7.25 an hour. They will either take jobs that offer higher pay or these jobs will have to substantially increase their pay in order to compete.

This means that the people who hire low-paid workers to clean their houses, serve their meals, or tend their lawns and gardens will likely have to pay higher wages. That prospect may sound like a disaster scenario for this small group of affluent people, but it sounds like great news for the tens of millions of people who hold these sorts of jobs. It should mean rapidly rising living standards for those who have been left behind over the last three decades.

Of course, Baker could just look at the data from Japan. Real wages there have been depressed in recent years, even while the labour force has shrunk:


Even more damningly, labour’s share of income in Japan has declined even more considerably than the United States, and other nations with a growing working-age population:


Matthew C. Klein asks an important question:

Perhaps Mr Baker was thinking of an older example: the Black Death, which killed about half the people in Europe. Many (including me until I looked it up) believe that the resulting shortage in agricultural labour led to soaring real wages for peasants and a redistribution of economic power away from landowners. Recent evidence, however, casts doubt on this hypothesis. While nominal peasant wages did indeed increase in the aftermath of the Black Death, real wages may have actually fallen for decades. That may have helped heavily indebted peasants, but everyone else had to endure punishing declines in their standard of living, not to mention the psychological trauma of surviving such a devastating plague.

And the evidence on the Black Death seems conclusive:

In southern England, real wages of building craftsmen (rural and urban), having plummeted with the natural disaster of the Great Famine (1315-21), thereafter rose to a new peak in 1336-40. But then their real wages fell during the 1340s, and continued their decline after the onslaught of the Black Death, indeed into the 1360s. Not until the later 1370s – almost thirty years after the Black Death – did real wages finally recover and then rapidly surpass the peak achieved in the late 1330s.

And if we look at China — a country which has seen stunning real wage growth in recent years — it is clear that that growth has come in the context of a growth in the working-age population. China’s working-age population hit one billion for the first time in 2011.

To me at least, this seems to suggest that while all else being equal, a shrinking working age population might lead to a more competitive labour market, all else is not equal. Employers invest in more capital-intensive processes like automation and robots to compensate for a lack of workers, or in our globalised world they shift operations to somewhere with a stronger labour force (like China today, or perhaps like Africa further into the future). Even more simply, a falling population as a result of a natural disaster like the Black Death, or even just as a result of demographic trends like Japan, may lead to an economic depression due to falling demand.

This suggests that Baker’s conclusions are extremely optimistic for labour, and that shrinking populations may be bad news for wages.

36 thoughts on “Do Wages Benefit From A Shrinking Labour Force?

  1. Pingback: Do Wages Benefit From A Shrinking Labour Force? | Fifth Estate

  2. Wages do benefit form a shrinking skilled manual handed (Can’t be replaced by machines or robots) labour force. Mostly in protected industries, or where super profits are earned. For example Australia’s mining boom sees tradesmen’s assistants earn up to 100K. They just can’t find the workers to work in remote areas. Now they want to bring in workers from overseas.

    Classic supply and demand.

  3. Another area where you will see a shrinking labour force is transport drivers. Trucks with non synchromesh gearboxes require experienced drivers, else the machine is damaged. Dangerous loads compound the problem.

    I did the tax return of one older experienced petrol tanker driver and he earned over 100K this year. A lot of overtime, but very well paid. When this driver retires who will replace? In his early days people gave new drivers a go in an old truck. Now every fleet manager has new trucks and wants to ensure they still have a job, by employing drivers with experience. This is a huge issue in the future.

    • Governments put themselves first. It just so happens that the wealthy are the ones who fill the government coffers. No coincidence…. Supply side economics was killed off in the US at the end of the last century.

      • True, politicians look out for #1. Since corporations and the wealthy are where the donations are coming from, it’s no wonder they are getting most of what they want.

        But I couldn’t disagree more with your comment that supply side economics is dead. We have the lowest effective tax rate for individuals and corporations since WWII, corporate profits are at record highs and union membership is at post-WWII lows…

  4. Baker should leave his ivory tower once in a while. As Aziz notes, Japan has a head start on this one too and the shrinking labour force has not led to jobs a plenty for the youth. Herbivore man is how it is described in Japan. No good jobs, few prospects and the men have basically given up. Stay at home with the parents, don’t date and spend their life gaming. Increasing demand creates economic opportunity and shrinking populations don’t have that apart from say the adult diaper industry. Baker is yet another academic genius; special advisor to US govt no doubt,

  5. I have heard that wage laborers benefited greatly from the population decline due to the Black Death — if they were among the survivors, of course. However, it occurs to me that those who didn’t survive were not using up many resources or consuming much, so the effect of the Black Death may have been to make the aggregate remaining population not only smaller but younger, richer, and more active. This is not the result we expect from the present-day aging of populations.

    • With less demand for existing houses, the % of income available to buy non necessities, rose. This probably ignited the industrial revolution.

      The same today. If we have declining birth rates, once the elderly generation passes on the availability of housing will saturate the market. People can start families without the burden of high mortgage debts.

  6. So… ideally, we want automation where possible, for the human workforce to work part-time so there’s enough work to go round and so people can have that leisure time we were sold when we were young – and for the wages to still cover a decent standard of living…

    • I never understood this dream that somehow automation would get everyone a rich leisure time; it does but without the “rich” bit – today we just call it unemployed. For you to benefit from automation you need to reap the rewards of the value it creates. To do that you need to be the business owner/shareholder. The employees just get laid off and the remaining salaries get driven down by competition for work in the jobs that still remain.

      Automation will therefore continue to add to the wealth/income disparity with a small minority extremely well off as direct beneficiaries of the value created and the rest on food stamps at the lowest level that keeps them revolting.

        • I take it your not in the 1% then! But seriously confiscation of assets is communism. Are you arguing for that really?

      • I am arguing that through regulatory capture (Lobby groups) the 0-1% has gained unfair advantage and has accumulated excessive capital. Most has been locked away in remote tax havens, and the capital invested in say real estate (Bigger tax sheltered homes, islands) and monopolistic businesses. It is not Communism. In Communism, people like my Great Grandparents were burned alive in their homes because they would not give up their 1/2 acre plot and cottage (Google Kulaks) That was the 99% losing their property, while the 1% dined on Beluga Caviar.

        • Is that really communism, though? Sounds to me like something else.

          Anyway, as to automation making everyone rich: rich is relative to something. If everyone’s rich, no one’s rich. If you have a machine in your basement that produces everything you need, and your neighbors do too, you can’t sell them anything. You have to do something else with your time.

          However, the present ruling class derives their social power and importance from managing the state, which is perpetually in a condition of economic and political crisis, and usually at war to boot. These crises are what make the ruling class of the state important; without them, they’d lose their jobs. So you can expect the crises and problems to persist.

  7. If you have a society of 2, 200, 200,000, 200,000,000, etc., the same economic dynamics apply. The difference is the amount of lying, cheating and stealing that goes on as the population systems enlarge.

    This is why the individual [or, in deference to the family unit], the very small village, is the ideal situation for human beings on all levels.

      • That may be the case, but you stand a much better chance of getting a fair deal when dealing with an individual then you do when confronting a large mulit-national corporation.

        • Ahh, but this is where big govt steps in and says, “I can help you little guy in your fight against the big corporation”. oh – hang on – something not quite right here…

        • Corporations are a legal fiction created by the state. For real competition, the state needs to stop discriminating toward the chosen few….

  8. Urbanization, centralization and corporate citizenship were all encouraged by central banks, and the state being in bed with the corporations. They increase corruption in other words.

    • What have you got against urbanisation? Most urban-dwelling people choose voluntarily to live in cities because they like the cultural cross-pollination.

      • People go where the jobs are.

        Urban concentrations supplied/supply the economy of scale necessities [factory-style work places, suppliers, transportation, etc.] that powered the industrial revolution.

        When you’re on 1st Street, your employees live on 2nd Street, and your suppliers are on 3rd and 4th Street, lots of saving accrue.

        I don’t believe that most people give a rat’s ass about cultural “cross-pollination.”

      • In Melbourne the hipster live in the areas where arts and cafes thrive (It takes money to have these businesses thrive) and they are mostly White, European. Cross culture pollination starts and ends at the “Infusion” Restaurants.

  9. Pingback: Do Wages Benefit From A Shrinking Labour Force? | My Blog

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