Table talk turns to structural issue of unemployment
Tuesday 25 June 1996
But the tone of these discussions has shifted during the last 10 to 15 years. It used to be principally about macro-economics: growth, inflation, currency movements, payments imbalances and the like. Now, while they still talk about that, there is for obvious reasons much more about one structural issue, unemployment. This has dominated the last three summits, and even led to a special jobs summit last year. Expect, this weekend, more of this.
But there are surely two things missing here. One is an acknowledgement of the structural changes taking place between the developed world and what is still seen as the less developed world; the other, the structural changes taking place within developing countries, partly as a result of rapid economic growth outside the G7.
Thus the seven - the US, Japan, Germany, France, the UK, Italy and Canada - are conventionally seen as the world's largest economies, but in reality (according to an OECD study last year) China is already larger than Japan, and India larger than France. The balance will shift further, so (on IMF estimates this time) by 2004 the developing world as a whole will have a larger output than the developed world.
But at least this shift in power has now been generally recognised and discussed in a fairly orderly way, even if the institutional structure of the G7 has failed to keep up. There has, by contrast, been a much more chaotic debate about the structural changes taking place within developed countries, with everything from competition from mainland China, the downsizing of industry, youth unemployment and the absence of a feelgood factor all jumbled together.
The last three are obvious concerns of mainstream politicians, and competition from low-wage countries has been brought to public notice by people like Ross Perot and Sir James Goldsmith to support their views on the need for trade barriers against the developing world. But much of the political focus has been very, well, politicised - something terrible is happening and we've got to stop it - and much less effort seems to have been made to try and understand the forces that are at work.
Some new work by the Bank Credit Analyst Research Group, presented at a conference in Bermuda last month, ought to be in the package of papers of all the G7 delegates. It is not a complete synthesis of all the structural forces at work in the world economy, but a thoughtful analysis of one of the most important: the impact of the new technologies of the last 15 years on the developed world, and the different impact this has had on the US, Japan and Germany.
The central point is that there has been a sharp fall in the cost of capital equipment during the last 15 years. This has been most dramatic in the case of computer kit where the price has fallen in absolute terms, but there have also been falls in real terms in machinery (see left-hand graph). Investment goods have also become much more capable, thanks largely to the incorporation of chips.
Meanwhile, labour has continued to cost more. This fall in the cost of capital vis-a-vis labour has encouraged companies everywhere to speed up the process of replacing people with machines. But the shift took place at different speeds in those three economies, happening first in the US because the dollar was seriously overvalued in the early 1980s and therefore the pressure on costs was greatest there; next it happened in Japan for the rise of the yen did not really get under way until the middle 1980s; and it happened last in Germany, for the mark was quite undervalued through the 1980s and only began to climb sharply after unification.
The result, BCA argues, is that the shake-out of labour from manufacturing in Germany has taken place much later than in the US or even Japan. It has further been impeded by cultural barriers.
You can see the shift in employment share between manufacturing and services (production and non-production in the case of Germany) in the right-hand graphs, which show the early, steady shift taking place in the US; a slower but equally steady shift in Japan, and not much change at all in Germany until the last two years when the shift of people out of manufacturing has been moving very fast.
What are the implications of this? BCA argues that the early and rapid use US industry has made of these cheaper and better capital goods underpins the rating that Wall Street has given to US companies. The long and sustained US expansion it sees as the pay-off for the speed at which the US has restructured. Insofar as Japan and Germany carry out similar improvements to their industries, they too will benefit correspondingly.
Japan, it argues, is making the necessary changes, with the "jobs for life" culture eroding rapidly as companies maintain investment and continue to improve efficiency. But it is not optimistic about the pace of change in Germany, arguing that what took the US 10 years might take Germany a generation.
Since Germany has the highest labour costs in the world, these will have to be brought into line and the slower that the country upgrades its capital stock and cuts employment in manufacturing, the greater the depreciation of the mark that will be needed to equalise labour costs.
There is a conclusion here for financial markets: If the mark (or the Euro which takes over from it) becomes a weak currency, there is a risk of higher inflation and higher long-term interest rates. Indeed, BCA expects German bond yields to move above US ones, just as they were in the 1960s.
There is also a conclusion for politicians. "The restructuring phenomenon," BCA concludes, "is not a random event. Rather it is being driven by fundamentally positive market forces that are global in scope. It is not case ... of mean-spirited entrepreneurs waking up one morning and simply deciding to shed labour that day. Cheaper capital equipment is producing waves of adjustment around the globe, and will continue to do so for the foreseeable future."
Interesting idea, but is it right? It is very difficult, in the middle of what is clearly a seismic set of structural changes in the world economy, to give the correct weight to the various forces driving those changes. We will not fully understand what is happening until long after the event, maybe never. But common sense would suggest that all the array of technology that has gone into the factories and offices of developed countries over the last 15 years must have had some impact, and seeing the advent of the micro-chip and the associated fall in the real cost of capital goods as prime movers is intuitively right. I don't think they will talk about this much in Lyons, but if political leaders want to understand why such giant changes are happening in the developed world, then they should. This is important.
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