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You're listening to the Economics & Country Risk Podcast from S&P Global Market Intelligence. In each episode, our experts will provide you with the where, how and when to make decisions that transform your business.

Kristen Hallam

S&P Global Market Intelligence sees 5 key overlapping themes for the year ahead. In this episode, we will cut across the themes of economic fault lines and resource security with a discussion of labor market trends we're tracking in 2024. I'm Kristen Hallam, lead content strategist for Global Intelligence and Analytics at S&P Global Market Intelligence, and your host for this episode of the Economics & Country Risk Podcast.

Joining me are my colleagues from the Pricing and Purchasing Labor Team at S&P Global Market Intelligence: Sophie Malin, Sam Parkin and Emily Crowley. Thank you all for being here today. Let's establish some context by talking about what's happened in recent years with labor markets. Sophie, could you give us a recap?

Sophie Malin

Of course. So let's roll back to the pandemic. We saw a drop in labor demand, but we also saw a lot of disruption to labor supply. We lost workers to early retirement, to COVID-19, but we also saw a lot of outflows of migrant workers returning back to their home countries and a reduction in the inflows of migrant workers and whether that be due to the uncertainty surrounding COVID-19 or the state border closures.

And then saw the economy reemerged from the pandemic lockdowns, activity rebounding, labor demand strengthening. But what this did was it really exposed those labor shortages that had been building in the background. We saw labor demand outstripping supply, job vacancies hitting record highs. So we saw real upward pressure build on wage growth.

And then we saw inflation rise to decade highs. This was off the back of supply shortages, the impact of the Ukraine war on food prices and energy prices. What this meant was that we then had additional upward pressure on wage growth. Now to tame the inflation, we saw countries around the world hike interest rates, subduing economic activity, suppressing labor demand.

So 2023 was this picture of labor demand weakening under the impact of tight monetary policy. Vacancy rates coming down as we start to see labor markets rebalance and inflationary pressures coming down. So it really was this turning in the title of wage pressure is starting to soften. However, 2023 was also our peak in terms of wage growth, and this was due to the fact that there's a lagged relationship between wages and inflation.

Kristen Hallam

So where do you see labor markets heading in 2024, which of these trends that you just talked about will be changing direction and which will persist?

Sophie Malin

The softening of wage growth pressure is certainly have been that we expect to continue into 2024. Global growth is that to slow further in 2024 as the previous interest rate hikes continue to subdue economic activity. This outlook will quite modest economic growth in 2024, will certainly put downward pressure on labor demand. But also off the back of that weaker economic activity, we're certainly expecting further improvements in terms of inflation.

So where 2023 largely represented the peak of wage growth globally, 2024 will really be this era of wage growth deceleration. Now one theme that is expected to continue in 2024 is tight labor market. So -- like I said, we've seen labor demand come down, labor markets start to rebalance, but that's really very much been in response to labor demand softening rather than really any improvements in terms of labor supply. So we still got underlying structural issues that continue to see labor shortages present in certain regions and in certain sectors as a result.

Kristen Hallam

Speaking of slowing inflation, 2 of our top 10 economic predictions for 2024 are that policy rates will be cut in advanced economies and that emerging markets will get an earlier start on their easing cycles. What influence will Looser monetary policy have on labor markets?

Sophie Malin

2024 is certainly set to be a pivotal year in terms of the stance towards monetary policy. Looser monetary policy will certainly help provide a more supportive environment in terms of labor demand, investment becomes more attractive, activity levels rise. So we should see a recovery in labor demand as a result, and it will certainly help to be more supportive in those sectors that have been most impacted by interest rate increases, such as the construction sector.

With demand improving, something that we're keeping an eye on is potentially the labor shortage risk. So a reescalation or reemergence of labor shortages that could see a reescalation in terms of wage growth. This really depends as to how economic activity reacts to their interest rate cuts, so how much this will be an issue? And bear in mind that our 2025 expectations is only a really modest improvement in terms of economic growth.

And another interesting angle that we have to think about is that even in this economic downturn that we've seen, we haven't necessarily always seen the levels of employment cuts that you would expect. Firms have been hoarding labor due to previous challenges in terms of being able to hire. This hoarding behavior that we've seen could see some suppression in the scale of labor demand rebound that we see once economic activity improves.

Kristen Hallam

So let's talk about wage growth trends in a bit more detail. Emily, what do we expect to see in North America on that front?

Emily Crowley

We've already seen wages start to slow in North America. Wage growth actually peaked. It peaked in 2023. For some, not all industries, it's dependent on which industry you were in. Construction was a little bit later to the game. Manufacturing was a little bit earlier. But we have started to see a slowdown. We expect to continue to see that slowdown in 2024.

So when I say wages peaked, I'm talking about annual wage growth of around 5%. If we think about the inflationary environment, inflation peaked in 2022 at 8%. So very strong wage growth for an economy that's used to seeing wages growing around the 2 percentage mark, right, more than twice that, but still not as strong as that strong inflation number that we were getting.

As inflation has slowed, we've seen wages start to ease in 2023, moving into upper 4% range. In 2024, moving into the upper 3% range but really staying in that 3% range going forward. Bargaining power has shifted and is going to remain with employees, giving them a slight edge. And again, we're still seeing a lot of pressure to recoup the real wage losses that we saw because of the high inflationary environment.

So where the normal pre-pandemic was wage growth are in the 2%, 2.5% range. Going forward, we think it's going to be a lot closer to 3%. And again, this is coming back to what Sophie was mentioning earlier that what is the lever that's moving, which is taking pressure off of wage growth isn't necessarily now we have an overabundance of skilled workers in the United States across all of these industries, it's really that demand has cooled off significantly.

And we've also seen a reversal of some of the consumer trends during the pandemic, which created this really big boom of labor demand. Labor demand is normalizing. But when we look at the U.S. economy, structurally, there remains some shortages, skill shortages, skills gaps in industries like manufacturing. Construction is a big one, even on the professional services side. So for 2024, things will continue to slow, but it's still a stronger environment than what we saw before the pandemic.

Kristen Hallam

Sophie, how about in the APAC region?

Sophie Malin

The outlook in the APAC region is a mixed one. We've certainly got some countries where we do expect some slowdowns in wage growth off the back of weaker demand and softer inflationary pressures. But there is a lot more support for wage growth gains than other regions, especially given that the region is set to lead economic growth in 2024. We've got robust domestic demand in India. Manufacturing expansion and infrastructure push is really helping to provide a solid environment for wage growth gains in 2024.

In fact, India is actually expected to lead global hiring intentions in the first quarter of 2024, but also we've got limited downside expected in terms of inflationary pressure in India. So it will be supportive for wage growth gains. Now Japan and China will also see wage growth strengthen in 2024.

For China, it's very much off the back of the continued normalization of activity levels as the economy continues to recover, albeit at somewhat of a moderate rate. But given that the message that's really coming out for 2024 from China, is that seamless measures will be appropriate and measured. We're really expecting that wage growth in 2024 to be a fairly moderate compared to the pre-pandemic levels that we saw.

The wage growth gains in Japan are very much tied to the fact that wage growth has been a major target of the Japanese government in terms of breaking out of this low inflation, low growth cycle that they've been in. We've seen historic minimum wage increases implemented. We've seen wage growth gains from labor unions in Japan reach close to 40-year highs. It's finally put Japanese wage growth on that path of acceleration. So we expect that path to continue in 2024.

Now Australia is actually one country where we expect to see some deceleration in wage growth. The reason I wanted to mention it though is because Australia has a really tight labor market and inflation is proving to be quite sticky. So we are expecting wage growth to soften in 2024, but it's really limiting the scale of deceleration expected. So more coming down from the higher 3% range to slightly lower 3% range. So not too much improvement in that.

Kristen Hallam

Let's shift over to Europe. Sam, you've been waiting patiently. Tell us about wage growth in Europe.

Sam Parkin

So wage growth was strong in 2023 following the high inflationary environment for both 2022 and 2023. Despite this real wage losses were incurred in 2023, that this is, of course, because of the high inflationary environment. Towards the end of 2023, we saw real wage gains we achieved as inflation lowered. So wages, they've passed their peak in Europe, but they do still remain strong. And it's worth remembering the lag between inflation and wages that we mentioned earlier.

So for most European countries, this lag is evident in the form of higher wage growth in 2023 and then a gradual decline to recapture these real wage losses moving into 2024 and 2025. So these countries include Germany, Sweden, Denmark, Netherlands, for instance. Now that's not the same for every European country that we've seen. So the U.K., which has had record wage growth, that had a more immediate reaction to inflation, and so we'll have a more immediate decline once inflation continues to lower.

And this is the same in Eastern European countries, so Poland and Romania. They, of course, have had higher inflationary environment. But they've also seen higher or more reactive wage growth in these years in 2022, 2023 and a quicker drop-off in 2024. So there are various aspects that have driven this as a component of inflation. Minimum wages are one of them. So Poland, especially in Eastern Europe, generally, has seen quite strong minimum wage increases. So there was a 15% increase in 2023. And moving forward, they're going to see 2 minimum wage increases in 2024.

Another example of this is Turkey, which is seeing really high inflation and is also seeing very high minimum wage increases. Another component of it is union agreements. Now strike actually is quite a potent topic in 2023. And as a result of this strike action, some wage deals were agreed. So if we look at the U.K., there was a 15% wage increase deal achieved in 2022 for Felixstowe strikes, so in transport and logistics.

If we look at Germany with IG Metall, we saw in 2023, roughly 5% to 5.5% union deals be achieved isolated in region and industry. Now we look at other deals that might be achieved. So IG Metall again achieved a deal for metalworkers in Eastern Germany of about 5.5% in 2025. Now this provides some upside rate, of course, because whilst this is isolated to a region and industry, if this is more national or if this spreads across more industries and regions, then it does push up forecast or expectations within manufacturing in Germany.

Another component is the complexity of the labor market. So what we saw, of course, just to reiterate, was mass retirees after the pandemic, we saw outflows of migration and the lack of inflows. Given that the economy reopened, we saw economic activity increase. We saw labor demand increase, but because of labor shortages, we saw vacancy rates increase. So vacancy rates are the percentage of jobs that go and fills. Vacancy rates increased up until about March 2022 when monetary tightening started to occur.

Since then, labor demand has fallen. So vacancy rates have fallen. However, this mainly masks labor shortages. In that the labor shortages remain, but labor demand has just lowered moving forward as interest rates do ease. What we'll be looking at is vacancy rates increasing because there's a labor shortage because the supply of labor isn't there. So there's still evidently a labor market imbalance.

Kristen Hallam

So given that a labor market imbalance remains following the pandemic, how are governments pursuing policies to address this issue?

Sam Parkin

There's been a couple of notable immigration bills over the past few months. Germany has introduced an opportunity card. So this will ease access to entry and access to work in the country. The components of this are that the salary threshold for this card is lowered. You could also apply from within the country rather than outside, and it's easier to bring your family too. So all these are incentive for migrant workers to come to Germany and work in Germany from outside the EU.

A second build was also introduced in January 2024. This is more about citizenship. So currently, as a migrant worker, you have to live and work in the country for 8 years. They've now lowered it to 5 years. And this lowers to 3 years if you're either proficient in German or you've been engaging in voluntary work. It's also lifted the balance your citizenship from outside the EU. So again, these are measures to attract workers to Germany.

France is in for something similar, although it does act as a deterrent and an incentive. Those currently illegally working in France can obtain a residency visa if working in a sector with labor shortages. However, it's also implemented sanctions for companies employing illegal workers, whilst also being able to find workers that are working there illegally.

The aim is to attract workers in these sectors, which are currently experiencing labor shortages. So when the economy recovers from interest rate hikes or from monetary tightening as monetary easing occurs, that the labor market issues that we saw previously in labor shortages won't occur again.

Kristen Hallam

Interestingly, despite labor shortages also being a key labor market concern in the U.K., as you mentioned, we are seeing a very different approach there. Could you tell us more about that?

Sam Parkin

The U.K. is taking a different approach. Like the rest of Europe, it does have a labor shortage issue. This was exacerbated by Brexit considering the tightened migration controls. However, given that vacancy rates have fallen closer to the pre-pandemic average because of monetary tightening and softening of economic activity, the U.K. has enforced tightened migration controls.

The new immigration bill has set to reduce the amount of skilled labor by increasing the salary threshold. So this is going to deter workers. The issue here is that whilst vacancy rates have lowered closer to the pre-pandemic average, once interest rates lower or monetary easing occurs, then labor demand will improve. And once this happens, then labor shortage will become evident again because of the lack of workforce available for companies.

Kristen Hallam

Sophie, Emily, where else in the world are you seeing structural issues in labor markets? I think the U.S. was mentioned earlier. Or where else in the world are we seeing immigration policy changes being proposed along the lines of what Sam was just talking about?

Sophie Malin

In APAC, we've also seen some expansions to existing Visa schemes. So in South Korea, we actually saw a 15-fold increase in terms of their skilled Visa in 2023. Yes, very significant increase. They were at first meant to increase it threefold. But given the extent of the issue, they increased it even further. And Japan, we saw an expansion in terms of the sectors covered by its long-term residency skilled Visa. And we're now seeing a proposal in terms of reworking of its international training program.

Now interesting kind of along Sam's theme as well, we are seeing some suggestions of a tightening in the immigration policy as well in the APAC region. So Australia, they expanded their immigration numbers in 2023 to try and relieve the real critical skill and labor shortages that I highlighted earlier. But now they're working to reform the immigration policy or to reform the immigration system very much focusing on skilled workers and tightening up the rules around low skilled workers and students.

Emily Crowley

I can jump in from the North American perspective. So Canada is one that's doing a massive push to increase the number of immigrants that are going to be resident Canadians. And again, they're looking at their demographic trends and have identified that their labor force needs to grow by quite a bit to make sure that they're able to continue to grow their economy and support all the job openings that they expect to see over the next 10 years.

The flip side of that, of course, is the United States where there's been immigration reform policies, but nothing has gotten through the Senate, I think, since the 1980s. So not a lot of promise in the United States. I think the constraints on immigration will continue, but Canada is the country in North America that's really standing out as doing some major pushes.

I guess I would flag the Middle East also as a region where there is a lot of very aggressive growth plans in countries like the UAE, United Arab Emirates and Saudi Arabia. Saudi Arabia, in particular, has some very aggressive plans as far as building entire new cities, which looks pretty spectacular. But that's going to require a massive labor force. Saudi Arabia construction labor force, 99% of it is coming from other countries, primarily in Southeast Asia. A certain extent of that is also coming from Africa.

So as we start to see labor shortages emerge, in some countries, not all countries, start to facilitate immigration for skilled workers, and it does tend to be in the same areas like construction and manufacturing. These jobs where we've had decades of messaging around career path potential being linked to college education and now we have this locational gap in many developed economies. Most countries are looking at the same kind of source countries. So there's a potential that it will accelerate brain drain, skilled drain from particularly Southeast Asia, but also might bid up competition for some of those workers.

Kristen Hallam

Interesting, interesting. So it's time to wrap up our discussion, unfortunately. But could each of you give us a little taste of what key indicators or hot topics in labor you'll be watching in 2024. And Sophie, could we start with you?

Sophie Malin

Given my APAC focus, I'll certainly really be focusing on the policy developments coming out of China, but also any improvements that we see in terms of confidence both consumer and investment to see if there is like a swing in attitude that would really help fuel stronger wage growth. But a key topic that we want to dig into more is AI. There's still a lot of uncertainty as to what the impact of AI will be. We just had a report come out from the IMF that's suggesting that 40% of jobs could be impacted by AI.

And it's also suggested that developed economies and the higher skilled jobs will be more exposed to both the risk and the rewards of AI. AI has got great potential in terms of productivity gains, but it will also present issues in terms of job replacement. So it will be really interesting to unpack actually whether its implementation will lead to wage gains or wage decreases in certain sectors and occupation. So certainly, an interesting one to unpick further.

Kristen Hallam

All right. That sounds like it could be a whole new episode, so I'll put a pin in that. Sam, let's come to you next. What key indicators or hot topics will you be watching in 2024?

Sam Parkin

So I touched upon it earlier, but with immigration bills in mind, I'll be watching how the labor market evolves as monetary easing occurs. So if we're expecting interest rate cuts to occur from the ECB, or the European Central Bank and the Bank of England around mid-2024, whilst it's going to be gradual, I'm interested to see how quickly labor demand will react to that and whether job openings as a result will go and fills.

So with Germany and France, if these immigration bills are successful, then these job openings will be filled and wage pressure won't arise because of a labor shortage. For the U.K., given that they're deterring labor, it will be interesting to see whether labor shortages will arise as labor demand increases after interest rates ease.

Kristen Hallam

And Emily, how about you, key indicators or hot topics for 2024?

Emily Crowley

So I think hot topics is Mexico. So there was another 20% minimum wage increase that was implemented January 1 of this year. So that was stronger than our expectations. We thought they were going to ease back a little bit and do a 15% increase. The key takeaway of this is just how aggressively the government is pursuing higher wages. Mexico still has a significant competitive advantage when looking at wage levels compared to the United States or Canada. So still a very attractive economy.

But again, these disruptions are starting to erode some of that competitive advantage for Mexico. So that's a big one. It surprised to the upside, so we'll be lifting our wage forecast for 2024, certainly. The other one that I'm keeping an eye on, similar to what Sam mentioned and also bringing in Sophie's point about AI is that monetary policy will begin to ease in 2024, which should bring back some labor demand. And those skill shortages are still lingering out there. We've seen some improvements in labor force participation, but still not back to pre-pandemic levels, which means we have a smaller labor pool that we're working with.

We have fewer workers. We've seen a fair amount of retirement. The way you can get out of labor shortages is either by getting more people into your labor force and training them or through technology and innovation. So I think that AI is going to be a pretty big piece of the puzzle. I think we'll see a very, very rapid pace of pickup in the United States, also probably because we are a little bit more accommodative from a policy standpoint for adapting new technologies but in using that to address some of these skill shortages and change the structure of the labor force. And I do think that, that's going to happen somewhat rapidly, especially in the professional sector.

Kristen Hallam

Plenty of food for thought for 2024. We'll have to have you all back on the podcast in the near future, see where things are going. So all that's left for me to do is to thank you, Sophie, Sam and Emily for sharing your insights with us and thanks to you, our listeners for tuning in. If you'd like a copy of our 2024 themes report, please use the link in the description of this episode. And please join us next week to learn more about our latest global construction outlook.

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