Central Bankers Warn of Labour Shortages and Inflation

Strategic Insights -

As the global economy faces the prospect of stagnant growth and rising inflation, central bankers from the Bank of Japan, European Central Bank, and Bank of England have warned that the influx of foreign workers is crucial to sustaining labour supply. In a recent symposium, the governors highlighted the pressing issue of ageing populations and declining birth rates, which are already constraining labour markets. They emphasized that immigration will play a vital role in offsetting the demographic decline, but the political climate is making this a contentious issue.

Key Takeaways:

  • The Bank of Japan's labour shortages have become one of its most pressing economic issues, with foreign workers making up just 3% of the workforce but accounting for half of recent labour force growth.
  • According to ECB president Christine Lagarde, the eurozone would lose 3.4 million working-age people by 2040 without an influx of foreign labour, and foreign workers were responsible for half of its growth over the past three years.
  • The Bank of England's governor, Andrew Bailey, warned that the demographic shift posed an acute challenge for the UK, with 40% of the population expected to be above the traditional working age of 16-64 by 2040.
  • Widespread labour shortages will fuel inflationary pressures, as workers gain more leverage to demand higher wages due to the shrinking workforce.
  • Mental health issues are a significant reason for inactivity in the UK, with long-term illness and fewer young people entering the workforce contributing to declining participation rates.
  • The challenge of labour shortages is not just about unemployment but about inactivity itself, as highlighted by Bailey.
  • The warning from central bankers reflects a growing consensus among policymakers that a steady inflow of foreign labour is necessary to sustain labour supply and mitigate the economic impact of ageing societies.

Statistics:

  • Foreign workers make up just 3% of Japan's workforce [1].
  • Foreign workers have accounted for half of recent labour force growth in Japan [1].
  • Foreign workers account for 9% of the euro area's workforce [2].
  • Foreign workers were responsible for half of the euro area's growth over the past three years [2].
  • The eurozone would lose 3.4 million working-age people by 2040 without an influx of foreign labour [2].
  • 40% of the UK population will be above the traditional working age of 16-64 by 2040 [3].

Sources:

[1] Financial Times

[2] European Central Bank

[3] Bank of England