Is the labor shortages here to stay?

Thomas Robert Malthus couldn’t have been more wrong. In his now infamous 1798 book, An Essay on the Principle of Population,  the English scholar argued that mankind was doomed to suffer increasingly severe and frequent famines as the population grew exponentially and food production failed to keep pace. Luckily, that didn’t happen. A couple hundred years later and with billions of more people on the planet, famines are much less frequent and severe than they were when Malthus’ theory was published. 

However, Malthus was no dummy. In fact, he was a skilled empiricist, it's just that the empirical data that existed up to that point was quite deceiving: Population booms caused famines. The problem with Malthusian theory was that it didn’t take into account technological innovation. The industrial revolution changed farming, allowing humans to get more food from the same plots of land. So the world’s population boomed, but famines actually decreased. 

When it comes to an aging population, the empirical data is also quite clear: Economic growth stagnates when a population ages. Here’s how Wikipedia explains the phenomena:

“As a country's population declines, GDP growth may grow even more slowly or may even decline.  If the decline in total population is not matched by an equal or greater increase in productivity (GDP/capita), and if that condition continues from one calendar quarter to the next, it follows that a country would experience a decline in GDP, known as an economic recession.  If these conditions become permanent, the country could find itself in a permanent recession.”

This is what we’ve seen time and time again, from Japan to Italy. 

What’s so concerning about the connection between population decline and economic stagnation, is that many of the world’s developed countries now have aging populations, not just Japan and Italy. This is part of the reason behind the labor shortage that’s plagued many economies since 2020. Here’s how the emerging trend is summed up in this We Forum article:

"In developed economies, such as the United States, Canada, Italy, Germany, Japan, Australia, United Kingdom and France, the generational bulge of Baby Boomers is ageing out of the workforce and moving into retirement. Smaller succeeding generations mean that there are fewer people available to fill these newly vacant roles. Stereotypes about what manufacturing work is like, a mismatch of skills needed versus skills possessed and increasing pressure for young adults to pursue college degrees in lieu of entering the workforce, all contribute to the lack of workers in critical jobs.

For years, this problem was often addressed by offshoring manufacturing to lower-cost countries. But now even manufacturing powerhouses, such as China, India, Taiwan, Bangladesh and Vietnam, along with Argentina, Colombia, and Turkey, are experiencing worker shortages and a discrepancy of skills that threaten a variety of industries. In Thailand, 500,000 more migrant workers from neighbouring countries are needed to fill roles in food processing, construction and agriculture. Poland also faces pressure as the nearby war has kept Ukrainian migrants from working in Polish factories. Around the globe, declining birthrates ensure that this shortage will remain a persistent issue."

But does demographic decline doom us to persistent labor shortages and other economic problems as a consequence? This scenario is possible, but it’s also possible that technological innovation will solve our problems, the same way modern farming got us out of the Malthusian catastrophe. 

If robots can take people’s jobs, then they can also fill in for people when there is a labor shortage. The better robots get, the more jobs they will be able to do. Similarly, new digital technologies will allow people to do jobs they previously couldn’t have. This is most clear in manufacturing and other traditionally physically demanding jobs that handicapped people weren’t able to do. Companies like Phantom Auto Tech make products that allow physically limited people to do warehouse jobs, often from the comfort of their living rooms. 

I don’t think anyone knows for certain what will come of the current labor shortages around the world and in different industries. It’s also possible that technological advances eventually mitigate the consequences of demographic decline, but only after a decade or so of economic hardship. However, in the wake of Chat GPT, I wouldn’t bet against a technological miracle this decade.