Cheap labour slows productivity growth

A nation’s mix of sectors largely determines its overall productivity and prosperity levels

And some sectors are much more productive than others

For example, the UK has some highly productive sectors such as manufacturing which are continually improving their (labour) productivity levels by investing in latest technology such as robotics, automation, IoTand AI

Japan is also a good example of this

The problem is, once these high-productivity sectors really get going, their workers rightly seek a share in the winnings they’ve helped produce via higher wages and enhanced employment benefits – however, there comes a point when employment costs become so high that management are forced to consider labour-substitute possibilities

Some then outplace labour, including skilled labour, and they have to find another job or join the ranks of the unemployed – if they do find another job, it’s more often than not in less productive service sectors where skills needed are less and there’s a plentiful supply of labour willing to work for much less pay

The result is many of the outplaced, especially the relatively skilled, that do find another job are often underemployed and/ or underpaid versus before – this breeds job dissatisfaction and attitudes which lower overall corporate morale – it also widens pay gaps and increases national feelings of inequality

Indeed, much of the productivity puzzle currently afflicting most developed nations is caused by this growth of employment in low productivity sectors

It’s these service sectors that have done least with the productivity-improving technology now on offer to them, much because of the relatively cheap labour available to them

And this is despite all-time low interest rates and plenty of investment capital being available to them

The fact is that, whilst plentiful cheap labour continues to be available to many service sectors, wages can be kept low putting a brake on overall consumer demand

And this ensures national productivity growth will remain tepid

It’s a vicious circle indeed!

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