Goodhart-Nangle, Demographic Destiny & Varieties of Capitalism

Briefly put, the story runs as follows:

  • A combination of the demographic sweet spot (a rising proportion of the population being of working age) and globalisation (the great doubling of the global workforce available to Western capital post-1990) resulted in a global glut of labour.
  • Faced with an oversupply of workers, the relative price of labour fell pushing down the labour share of national income in the advanced economies and depressing wage growth.
  • The availability of cheap labour reduced the need for labour saving, productivity enhancing capital investment in the West.
  • Lower demand for capital (and less inflationary pressure from wages) reduced real interest rates.

The result: lower inflation, weaker wage growth, lower investment, falling real rates and rising inequality. The symptoms of what some see as secular stagnation but what are to Nangle a reflection of the fact that labour bargaining power sets the natural rate.