How will labour market trends respond to global shocks?

The world has been racked by global disruptions in recent years, from covid-19 to the war in Ukraine, all of which have had knock-on effects such as higher inflation and supply shortages. This extended period of instability and insecurity is now widely referred to as “permacrisis”—a portmanteau of ‘permanent’ and ‘crisis’. With heightened risks associated with rising geopolitical tensions and the destructive forces inherent in climate change, this state of affairs will remain for some time.

Recent global shocks have also caused significant shifts in global labour markets. In particular they drove skilled labour shortages^1,2 as many people left the workforce in 2021 due to covid-19.^3,4,5 Should these shocks persist or new shocks emerge this year, labour markets could be further disrupted. It is therefore necessary for businesses to understand these developing shocks and their potential impact on labour markets to help them plan accordingly.

Using the Global Trade Analysis Project (GTAP) dataset, Economist Impact modelled the effect on GDP, trade and labour demand of three particular shocks: worsening tensions between the US, Taiwan and China; higher inflation and heightened monetary policy; and increased technological adoption in trade operations (see the ‘About this research’ section for more details). In this article, we analyse the potential impact (positive or negative) on labour markets of each of these shocks.

Geopolitical changes could lead to sizeable labour market changes

Worsening tensions between the US, Taiwan, and China could see a reduction in employment, across all regions in 2023 compared with 2022 levels (the exception being South America). This reduction in labour demand will affect all sectors except energy where we forecast an increase.

Our estimates indicate South America may be one of the few beneficiaries of the tensions over Taiwan. As China and the US compete for influence in the region,⁶ trade and investment from these two countries is likely to grow, powering a positive impact on employment in the region.

Our model predicts that North America, Europe (due to its strong trade links with both the US and China) and Asia Pacific will see declines in labour demand under this scenario by 0.1%, 0.15% and 0.02% respectively. The trade disruptions resulting from heightened geopolitical tensions drive uncertainty in demand and logistics planning, reducing trade activity and ultimately the demand for labour.

Geopolitics and associated, reactive national policies, such as the US Inflation Reduction Act (IRA), can impact labour market trends in opposite ways. For example, the IRA could generate more than 900,000 jobs over the coming decade.⁷ Businesses will need to factor these divergent trends into their scenario planning.

Economic volatility may restrict labour demand

The world has experienced high inflation since 2021, when the effects of pandemic-related supply disruptions and expanded quantitative easing (QE) to protect populations during lockdowns fuelled inflationary pressures. Central banks have now changed tack and are pursuing aggressive monetary tightening in response to the threat. Inflation is expected to ease in 2023 and 2024, although it will remain above many countries’ 2% target. If the world experiences another spike in inflation (and continued interest rate hikes), perhaps due to further supply-chain disruptions, there would be adverse consequences on labour demand.

Under this scenario of higher inflation and further monetary tightening, the executives we surveyed expect exports and imports to contract to some degree by 52% and 41% respectively, which will have a dramatic knock-on effect on labour demand for 2023. Our model estimates a decline in employment for all regions, with Europe seeing the biggest decline in labour demand (in percentage terms) of 0.5%, compared with 2022.The Asia Pacific region is estimated to see the biggest decline in employment figures numerically with almost 115 million (0.3%) fewer people employed.

Labour markets continue to remain tight at the start of 2023. With layoffs expected in many industries,⁸ predominantly technology, coupled with high inflation and interest rates until at least 2024,⁹ businesses need to be mindful of the impacts on labour demand.

Technological adoption could benefit labour markets

Interestingly, where technology adoption is often presented as a double-edged sword—on the one hand raising productivity and on the other hand reducing labour demand— our model estimates an appreciable increase in employment levels in all regions, except the Middle East.

Under this scenario, European labour demand is expected to see a 3.5% increment for skilled and unskilled labour in 2023, compared with 2022. This is expected as Europe is already a top destination for many tech jobs. Europe is closely followed by North America (1.85%) and Asia Pacific (1.96%).

As David Lawrence, research fellow at Chatham house says, “Low wage, low skilled labour is less important than it used to be and actually what's more important is your ability to create your own technology, and that depends a lot more on high skilled labour.” Mr Lawrence also points out that labour shortages in the UK due to Brexit have led to a high level of technology adoption. Technology adoption is key to overcoming disruption and saving costs in the long run. It also reduces human error while allowing firms to focus on core business activities.

Where we find that under the right assumptions further technological adoption can lead to further job creation, the opposite can also be true. Much is down to how businesses design and deploy technology. For example, if employees are not adequately trained to make use of new technology, its full benefits will not be realised. So, increased technological adoption could too easily disrupt employment patterns.

As seen in the GTAP results, each scenario and associated shock has a different and significant impact on labour market trends. Businesses should factor these insights into their scenario planning to ensure they are not caught out if one or more of them arise.