The Era of Abundance Is Over End of Cheap Labour, Cheap Energy, and Globalization

Is the Era of Abundance over? For decades, productivity was high, and labor costs were low. Shipping material around the world has led to globalization. As global countries pumped oil and gas and enhanced electricity propagation, energy sources were abundant. In the past decade, many of the drivers of abundance have evaporated. War, political unrest, and disease have changed supply chains, driven up the cost of goods and services, and reduced globalization with a “me first” attitude.

What is an Era of Economic Abundance?

Various factors contribute to the favorable economic conditions during an era of economic abundance. The economy experiences sustained, strong growth rates, typically driven by increased production, investment, and consumption. Industries thrive, businesses expand, and job opportunities abound.

The development and adoption of transformative technologies often drive economic abundance. Innovations drive productivity gains, efficiency improvements, and the creation of new industries and markets, boosting economic growth.

Abundant availability and access to natural resources, energy, capital, and skilled labor can support economic growth and prosperity. These resources can be harnessed to fuel production, investment, and entrepreneurship.

Stable and supportive government policies, including sound economic and fiscal policies, regulatory frameworks that foster competition and innovation, and infrastructure development, can facilitate economic abundance.

Participation in international trade and the interconnectedness of economies can provide access to larger markets, investment opportunities, and knowledge transfer. Expanding business opportunities and facilitating specialization can enhance economic growth and abundance.

Why Have Labor Costs Accelerated Higher?

Labor costs have increased due to various factors impacting labor supply and demand. A key driver of labor cost increase is wage growth. When demand for labor exceeds supply, particularly in tight labor markets, employers may need to offer higher wages to attract and retain workers. Economic growth, low unemployment rates, and labor market shortages can contribute to wage pressures.

The level of skills and education required for specific jobs can impact labor costs. Industries or occupations that require specialized knowledge or expertise may face higher labor costs due to the limited supply of highly skilled workers and the investment needed to acquire those skills. For example, programming skills that can design and host artificial intelligence.

Labor costs also include non-wage expenses such as benefits and social security contributions. Employers may need to allocate more funds toward employee benefits, including healthcare, retirement plans, paid time off, and other perks, which can contribute to rising labor costs.

Laws, regulations, and government policies can influence labor costs. Minimum wage laws, overtime rules, mandated benefits, and regulations related to workplace safety and labor standards can increase labor expenses for employers.

Changing workforce demographics and preferences may impact labor costs. For example, if workers prioritize work-life balance, flexibility, or job security, employers may need to offer competitive compensation packages and benefits to attract and retain talent.

General inflation and increases in the cost of living can influence labor costs. As prices for goods and services rise, workers may demand higher wages to maintain their purchasing power, leading to increased labor costs.

What Has Ended Cheap Labor?

Expensive labor is driven by higher prices of goods and services, which creates a circular process. Inflation, which refers to the general increase in prices of goods and services over time, can be influenced by various factors.

When aggregate demand for goods and services exceeds the available supply, it can lead to demand-pull inflation. This typically occurs during periods of strong economic growth and increased consumer spending. When demand outpaces supply, businesses may raise prices to balance supply and demand, contributing to inflation.

Cost-push inflation occurs when the cost of production for businesses increases, leading to higher prices. Factors driving cost-push inflation can include rising wages, increased raw material costs, energy price hikes, or government regulation that increases business expenses. These factors can force businesses to pass on their increased costs to consumers through higher prices.

Monetary factors can also drive inflation. An excessive increase in the money supply in the economy, often fueled by expansionary monetary policies such as lowered interest rates or quantitative easing, can lead to inflation. Prices can rise when more money is in circulation chasing the same amount of goods and services.

The cost of imported goods and services can impact inflation. If the value of the domestic currency weakens compared to other currencies, it can make imported goods more expensive, leading to higher prices for consumers. Inflation expectations, both by businesses and consumers, can influence actual inflation rates. If people anticipate higher inflation, companies may try to raise prices preemptively, and workers may demand higher wages, contributing to a self-fulfilling prophecy of inflation.

Natural disasters, geopolitical events, or disruptions in global supply chains can impact the prices of specific goods and services, which can have spillover effects on overall inflation.

The Deceleration of Globalization

Sharing resources that drive energy and intelligence is contracting. The move toward globalization, where commerce could occur at any point, appears to be decelerating. Globalization refers to the increasing interconnectedness and integration of economies, societies, and cultures worldwide. It is a multifaceted process involving exchanging goods, services, ideas, information, and technology globally. Here are some key aspects of globalization:

Globalization involves the liberalization and expansion of international trade, investment, and financial flows. It has created global markets, supply chains, and multinational corporations operating across borders, fostering economic interdependence among countries.

Advances in transportation, communication, and information technologies have played a crucial role in facilitating globalization. These technologies have made it easier and more cost-effective to transport goods, communicate with people globally, and access information across borders.

Globalization has seen increased financial integration and cross-border trading, allowing capital to move freely between countries. This has led to increased foreign direct investment (FDI), cross-border capital flows, and the integration of financial markets.

Globalization has led to the establishment of international agreements, organizations, and institutions to govern and regulate various aspects of global affairs. Examples include the World Trade Organization (WTO), the International Monetary Fund (IMF), and the United Nations (UN).

The Push and Pull of Covid and Productivity

Abundance comes where there is accelerating productivity. The COVID-19 pandemic has had both positive and negative impacts on productivity. On the one hand, the widespread adoption of remote work and flexible schedules during the pandemic has allowed some individuals and organizations to maintain or even enhance productivity. Remote work eliminates commuting time, increases efficiency in specific tasks, and provides flexibility that can benefit some individuals.

On the other hand, several factors have negatively affected productivity during the pandemic. Many businesses, particularly those in industries heavily impacted by lockdowns and restrictions, have faced significant disruptions and economic challenges, leading to decreased productivity. Additionally, balancing work and personal responsibilities, adapting to virtual collaboration tools, and dealing with the emotional toll of the pandemic have also contributed to productivity challenges for some individuals.

Abundance Comes with Easy Money

During the past few years, central banks worldwide increased interest rates to fend off rising prices. When a central bank raises rates, abundance is removed from the market. A central bank’s tightening interest rates increases the benchmark interest rates or the banks’ borrowing cost. This policy tool is typically used to control inflation and promote economic stability. Here are some potential effects of a central bank tightening interest rates.

Higher interest rates make borrowing more expensive for businesses and individuals. This situation reduces the demand for loans, decreasing borrowing and lending activities. It can slow down investment and consumption, which may impact economic growth.

Higher interest rates can discourage consumer spending, as it becomes more expensive to finance purchases through credit. This situation can lead to decreased demand for goods and services, affecting businesses and potentially slowing economic activity.

Higher interest rates can incentivize individuals and businesses to save rather than spend. This can lead to an increase in savings rates as higher returns on savings become available. Increased savings can potentially provide more funds for investment and help drive economic growth in the future.

Higher rates followed rates near zero, where money was free. The decision by the Federal Reserve to lower interest rates to near-zero levels in response to the 2008 financial crisis and the COVID-19 pandemic was driven by several objectives and considerations. This situation occurred again during the outbreak of Covid-19.

Lowering interest rates encourages borrowing and spending, as it reduces the cost of borrowing for businesses and individuals. The Fed aims to stimulate investment, consumption, and overall economic growth by making credit more affordable.

During times of economic downturn or recession, there is a risk of deflation, which is a sustained decrease in general price levels. Deflation can be harmful as it discourages spending and investment, leading to a downward spiral in economic activity. By lowering interest rates, the Fed aims to encourage inflation and prevent deflation from taking hold.

Lower interest rates can provide liquidity to financial markets and help stabilize them during times of stress. It can make it easier for banks and other financial institutions to access funds and avoid liquidity crunches. This reduces the risk of financial instability and promotes market functioning.

Lower interest rates can complement these efforts when the government implements expansionary fiscal policies, such as increased government spending or tax cuts. By reducing borrowing costs, the Fed supports the government’s fiscal stimulus measures and helps amplify their effects on the economy.

The Bottom Line

Several factors have led to the end of the Era of Abundance. Workers are now expecting higher wages. Wages bleed back into food and energy prices, which has elevated prices. The Fed has done its job raising rates and capping spending, but deflation is not on the horizon, which will likely signal that abundance is over.

COMMENT NOW