COLLISION OF AGING POPULATIONS, NEW AUTOMATION TECHNOLOGIES AND RISING INEQUALITY LIKELY TO TRIGGER THE BIGGEST DISRUPTION IN THE LAST 60 YEARS

In a new report, Bain & Company flags eight business implications likely to result from the impact of these three forces

New York – Feb. 7, 2018 – A perfect storm is brewing for global businesses: the combination of aging populations, the adoption of new automation technologies and rising inequality could collide to trigger a disruption far greater than the world has experienced over the past 60 years. A new report, Labor 2030: The Collision of Demographics, Automation and Inequality, from Bain & Company’s Macro Trends Group finds that the impact of these forces in the early 2020s could ignite a major transformation that will play out over several decades. Business leaders must face the challenge of putting these changes in context while they consider the effects on their companies, their industries and the global economy.

“Companies and investors grapple with changing conditions constantly,” said Karen Harris, managing director of Bain’s Macro Trends Group and author of the report. “However, our research points to an unusual level of volatility in the decades ahead due to these three forces – demographics, automation and inequality – that will combine in different ways, sometimes reinforcing each other, sometimes offsetting each other, and make it difficult to predict how the business environment will evolve.”

The Era of Plentiful Labor is Ending

The abundance of labor that has fueled economic growth since the 1970s – spurred to growth by women entering the workforce, the opening of China and India, and the baby boomer generation – is winding down. Most of the most of the world’s workforce is aging rapidly, slowing labor force growth. In the U.S., for example, Bain anticipates labor force growth will slow to 0.4 percent per year in the 2020s. Deceleration in labor force growth in OECD countries could result in a $5.4 trillion GDP shortfall by 2030.

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.

Rising Productivity Solves One Problem…but Creates Another

Faced with a rising scarcity of labor, companies and investors are likely to draw increasingly on automation technologies, which, in turn, would boost labor productivity by an average of 30 percent, compared with 2015, with rising impact over time.

But to grow, economies need demand to match rising output. Bain’s analysis shows automation is likely to push output potential far ahead of demand potential. In the base case scenario, the rapid spread of automation may eliminate as many as 20 percent to 25 percent 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 only about 20 percent 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.

How Income Inequality Threatens Growth

Inequality has many possible causes. For one, aging populations typically increase wealth inequality because older households tend to have higher levels of accumulated wealth relative to a younger household at a similar socioeconomic level.

The impact of automation on income varies. Bain’s base-case scenario, in which automation displaces 20 percent to 25 percent of U.S. workers, will hit the lowest end the hardest. Bain analysis shows that workers currently making between $30,000 and $60,000 per year are likely to experience the greatest disruption from automation: up to 30 percent could be displaced. Automation is expected to have a lesser impact on those with incomes between $60,000 and $120,000 a year and the least negative impact on those earning more than $120,000.

Implications for Businesses

Bain has identified eight practical business implications that follow from its base-case scenario:

• Be wary of following market momentum—volatility will increase. Leadership teams can prepare for a more turbulent business climate by making resilience a higher strategic priority than it has been in recent years.
• Middle-class markets are likely to erode. Consumer goods and services businesses will need to carefully stake out their ground across the socioeconomic spectrum because the landscape is likely to change midway through the coming decade as investments in automation begin to decline.
• Expect an interest rate speed bump. The demand for capital to support automation in the next decade, combined with shifting demographics, could temporarily tip some economies into supply-constrained growth and cause a rise in interest rates. Business leaders and investors thinking of taking a wait-and-see approach may find there will be very little time to react.
• Automation could fuel a 10- to 15-year boom followed by a bust. Bain expects investment in new automation technologies starting in the next decade to follow the same pattern as all major capital investment waves. The early part of this investment wave will create major opportunities for businesses and investors.
• Highly skilled, high-income labor will grow increasingly scarce. As competition grows for scarce talent, leading companies will invest more to attract, grow and retain scarcer high-end talent and ensure that their workforce is as productive as possible.
• Baby boomer spending growth will peak in the 2020s before tapering. Over the next decade, businesses and investors need to be mindful of the potential flattening of demand growth toward the end of the decade, in combination with other risk factors that could start to emerge from other parts of the macroeconomic landscape.
• More government in more places is likely. For businesses and active investors, stronger regulation or antitrust enforcement may make it more difficult to gain scale and force limited diversification. In particular, large-scale tech businesses will face continued scrutiny due to their size and competitive power despite the significant value they have created for consumers.
• Intergenerational conflicts will potentially rise, drawing in businesses. For businesses and investors, government transfers to better support one group or another may signal rising or falling spending patterns and business opportunities. By contrast, a shift in the balance of transfers to working-age households may diminish opportunities for senior-focused goods and services. Businesses, management teams and even shareholders may be drawn into 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.

“The global economy will eventually recover from the temporary imbalance, but getting there is a challenge,” said Harris. “Clearly, there is no set formula for managing through significant macroeconomic upheaval, but there are many practical steps companies can take to assess how a vastly changed macroeconomic landscape might affect their business and how to position themselves for change. Organizations that can absorb shocks and change course quickly will have the best chance of thriving in the turbulent 2020s and beyond.”

Editor's note: To arrange an interview, contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102

# # #