Demographics and Dynamics of the Labour Market that Help or Hinder Economic Growth

How Do Labour Markets Work and How they Influence Economic Growth?

Labour markets operate in a demand and supply equilibrium wherein excess or shortage of labour has the potential to skew wages in favor or against the workers as well as the capitalists.

When labour is abundant, firms have a larger pool of workers to choose from and this leads to lower wages, though when the economy is booming, sooner or later, the wage equilibrium settles in.

Conversely, when labour is scarce, wages are high as firms are forced to do with lesser numbers of workers in the market.

Thus, the availability of workers and the demand and supply of labour determines how the economy works.

In this context, it is worth noting that when a nation is youthful or has plenty of young people to choose from for employment, then there is the twin advantage of firms gaining as a result as well as them choosing to expand and more firms (foreign as well as domestic) entering the market in a big way to capitalize on the favourable labour market conditions.

On the other hand, nations those are ageing and have lesser numbers of workers who are looking for employment, have lesser economic growth as firms are forced to put off their expansion plans and to spend more money on hiring expensive workers.

What are Demographics and How Do They Affect the Labour Markets and Nations

The term Demographics which indicates the composition and makeup of the workforce in terms of age of the population who are in the market determines many things including the profits made by the firms and in turn, influence the economic growth of nations.

For nations that are having favourable Demographics, such as India and some Asian countries, the potential for economic growth is more whereas for nations that have unfavourable Demographics, their economies slow down and the resulting economic growth is lesser.

The favourable Demographics are known as the Demographic Dividend wherein the nations with such advantages attract firms from all over the world tempted by the prospect of lower wages and abundant pool of workers.

On the other hand, nations without the Demographic advantages such as the Ageing West have to bring in workers from elsewhere to cope with the demand supply mismatch in the labour markets.

As the saying goes, Demography is Destiny and hence, Demographics have the potential to make or break the fortunes of nations.

What is the Demographic Dividend and How the West and Asia Differ on This Count

Having said that, just having the Demographic Dividend is not enough by itself to lift economic growth.

For that to happen, there must be enough numbers of jobs in the market to absorb the Millions of young workers entering the workforce.

Indeed, the combination of favourable Demographics and High Unemployment is a recipe for disaster as India is finding now wherein the mass social unrest due to huge numbers of unemployed youth is leading to protests and violence as the competition over scarce jobs intensifies.

This is what has prompted some economists to dub this situation as a Demographic Nightmare which means that unless there is drastic improvement in the job situation, India is likely to become more polarized and unstable.

On the other hand, it is also not the case that nations with Poor Demographics can necessarily fall back and slow down.

Indeed, by encouraging Immigration and bringing in more Guest Workers, some Western countries have been able to counter the unfavourable Demographics.

Of course, with anti immigrant sentiment running high in the West, it is anybodys guess as to the future direction of economic growth there.

Thus, the argument we are making here is that it is a dicey situation for any nation to grapple with either too many or too few workers.

Globalization, Immigration, and Search for Solutions

Continuing the argument, there are no easy solutions for any nation whether having favourable or unfavourable Demographics.

While Globalization and Immigration were thought to the answers to making nations grow faster as well as higher, the Great Recession of 2008 belied that hope wherein it was found that only those at the top have been gaining at the expense of those below them.

On the other hand, experts have pointed to the success of the Chinese Economy in making the transition to a Free Market Economy and lifting its Multitudes from Poverty and Destitution.

Perhaps this model which is a combination of State and Private Capitalism can serve as the Blueprint for countries such as India.

Having said that, without a Manufacturing Renaissance, India cannot just create the number of jobs that are required.

Therefore, the point here is that one must not waste the Demographic Window and hence, the next Government has to make job creation as the number one priority.

On the other hand, the West would also suffer if it turns its back on Immigration as then it would be left with fewer alternatives for filling the jobs.

Conclusion

Lastly, the world is at a Tipping Point as far as Demographics are concerned as the Carrying Capacity of Asian and African nations are reached and those of the West are declining.

To manage this challenge calls for exemplary leadership and courageous policy decisions none of which seem to be on the Menu as far as the leaders of the world are concerned.

Indeed, populism and Xenophobia would only raise leading to more authoritarianism if the present Demographic trends and the Job Situations continue.

Moreover, automation would make many jobless and add to the lethal cocktail that is now brewing.

To conclude, there is a need for collective action and a need for more liberal policies if we are to avert disaster.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


Economics of Human Resources