(taken from Wix's library)
Hello everyone! A few years ago, I liked making predictions when approaching the end of the year. Some of them worked out fairly well (don’t just trust me, go check yourselves) while other ones didn’t… but as every other great Economist of this world, I always had a good explanation of why it didn’t come out the way I predicted.
Last year around the beginning of October, I made a prediction regarding inflation. I told my students in class that, unlike what the Bank of Canada, the Fed, the ECB, and the IMF were predicting, I thought that inflation would stay for a while and not just be “transitory” (their prediction ended up being a big joke… and I’m still reminding them of it right now).
Unfortunately, I had not re-started writing to all of you guys and I have no proof that I had indeed a better understanding of the economy than the most powerful institutions of Economists in the world… just saying!
Anyhow!!!! One of the big questions for 2023 is about recession: will most of the world, perhaps particularly rich OECD countries, face a strong recession early 2023? To be fair, I don’t know and I’m not particularly interested in that question… you should probably know that a significant number of Economists have been predicting that the answer is yes (although I think it might be a soft landing instead, but I don’t have much time spent looking at that either).
Something I am interested about is the composition of the labour force and any potential structural change in the labour market. I mentioned that topic in my last post and it is my new pet research project. I am particularly interested in looking at the following changes: (1) ‘early-ish’ retirement of the remaining baby boomers; (2) less available workers with more demand for them; (3) lower productivity of the labour force overall.
If these three factors occur together, we could see a strong improvement in labour conditions (including real wages) and a substantial increase (again) in sustained inflation for a few decades. These price increases can continue being a problem as long as the baby boomers are alive and active (consumers in retirement for example)… when enough of them die out or become an insignificant part of aggregate spending, then we can see a meaningful reduction of real wages and inflation.
As I argued in the previous post, this move has started in the second half of 2021. I propose that some of the inflation seen during that time was due to this structural change in the labour force.
Now… 2023 will not see the full display of that force. However, we could see more evidence of that shift, if such a shift will indeed occur (this is my working hypothesis at the moment, this is definitely not part of most Economists’ predictions) next year. Here are the things I will be looking at in order to see if my fears (interest) are justified:
(1) retirement rates overall, if I am right they will be increasing significantly;
(2) labour force participation rates and unemployment rates, if I am right the labour force participation rate and the unemployment rate will both decrease;
(3) measures of productivity, perhaps particularly amongst office workers, if I am right they will decrease.
We would probably need to wait to the end of 2023 to see if any of those have moved significantly during the year. I hope I will still be writing to you guys by then and be able to give you a summary of what changed in those variables.
One big change that could make this whole topic and all my fears (interests) completely irrelevant is automation. If firms can replace people by machine at a rate never seen before, and AI seems to be pulling us in that direction, then this will completely dwarf any of my current concerns about the labour market. If AI takes over the world in the next few years, directly or indirectly, then retirement rates will increase to close to 100%, the labour force participation rate will go to close to zero, unemployment rates will become zero, and productivity will be many many times higher than what it is right now.
Although 2023 might show the beginning of those significant changes (we saw indications of that in 2021, when I started thinking about that issue regularly), it may be quite subtle.
I hope you guys enjoyed!
Take good care of yourselves and your loved ones and have a good time!