Right policy choices can offset negative impacts of technology, demographic changes – IMF

The International Monetary Fund (IMF) says right policy choices can offset the negative impacts of technology and demographic changes.

In its analyses of how demographic and technological changes are affecting productivity in its latest World Economic Outlook (WEO) published April 9, 2018, the Breton Wood institution researchers noted that technological evolution of manufacturing will transform the labour force and affect productivity, but adequate policies can cushion the impact and harness the potential to foster prosperity.

The increasing role of artificial intelligence in industrial production, the reduction of manufacturing worldwide and increasing inequality pose major threats, the researchers said.

However, they also highlight the opportunity to create a new era of growth for developed and emerging economies.

The second chapter of the WEO, which tackles the evolution of labour participation in advanced economies, pointed out that despite the upheaval created by the financial crisis of 2007–09 and the ageing of the population, the aggregate labour force participation rate has barely changed over the past three decades.

Nonetheless, the researchers noted that major changes have taken place in some regions and demographic groups with several high-income nations recording considerable increases in the number of active people.

Germany, South Korea, the Netherlands and Spain have recorded gains of more than 5 percent from 1985 to 2016.

“The findings in the chapter suggest that many countries have so far successfully counteracted the negative forces of ageing on aggregate labour force participation by strengthening the attachment of specific groups of workers to the labour force,” the IMF said.

“Policies that reduce disincentives for joining or remaining in the labour force and policies that help workers combine family and work life can broaden these gains by enabling people who are willing to work to do so.”

The overall stability has coincided with important transformations in the labour participation of women and men. The share of women working or actively looking for work has increased by almost 10 percent since the mid-1980s. In contrast, the average rate for men has fallen by more than 4 percent. This reduction is partly related to the transformation of manufacturing, where technology is reducing the demand for mid-skilled workers.

“Further investment in education, training, and activation policies cannot only encourage individuals to be active in the labour market but also make the workforce more resilient to global developments, such as technological progress or globalisation, that may obviate the need for certain skills,” the IMF noted.

Average wages in manufacturing are higher than in services. But levels of inequality in services are mirrored across the economy Bertrand Gruss, lead author of the chapter.

In the third chapter, researchers explore whether shrinking manufacturing sectors and higher inequality in developed nations are linked.

“Average wages in manufacturing are higher than in services. But levels of inequality in services are mirrored across the economy,” said Bertrand Gruss, the lead author of the chapter, during a press conference.

As a result, countries with lower overall inequality such as Denmark register lower wage divergence in services than, for instance, the US. Some regions are managing to prevent the worst effects derived from a changing manufacturing sector.

“Northern European countries are handling the process successfully. Their economies are shedding some jobs, but selectively,” said Gian Maria Milesi-Ferretti, deputy director of the IMF’s research department.

The predominance of lower-skilled positions in services and fewer but highly qualified jobs in manufacturing may lead to higher income imbalances. However, Gruss says this is not an inevitable outcome.

“The service sector can raise productivity growth as much as manufacturing,” he said.

“Actually, in China and India, services record a higher productivity expansion than manufacturing. This would allow low-income countries to catch up faster with higher-income countries.” The author concludes that a decline in manufacturing may not be a major source of concern as long as the authorities adopt the right policy measures.