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Unbalanced skill levels could make the world more unequal

Jun 16th 2012 | WASHINGTON, DC | from the print edition

THE working world was much cosier in 1980. Just 1.7 billion people were picking up a pay packet a generation ago, nearly half on farms. Globalisation has since upended labour markets. In 2010 the world counted 2.9 billion workers, with the emerging world responsible for most of the increase: it added 900m new non-farm workers, of which 400m live in China and India alone. The meaning of these striking numbers is the subject of a new study by the McKinsey Global Institute, the consultancy’s research arm.

The integration of China’s and India’s masses into the world’s labour market lifted legions out of poverty. The transition from soil-scratching powered rapid growth. China’s non-farm workers are seven times more productive than peasants. India’s performance lagged behind China’s because it struggled to move workers away from agriculture. Non-farm employment merely kept pace with the overall growth of India’s labour force.

In rich countries, competition from millions of new, low-skilled workers has acted as a drag on wages for less-skilled ones in advanced economies. At the same time, rich-world firms have invested heavily in new technology, raising demand for skilled workers faster than schools could increase supply. In combination, these two trends raised inequality in developed countries and strengthened the hand of capital relative to labour. Workers’ share of overall income fell 7 percentage points between 1980 and 2010.

These dynamics will continue, but also change, reckon the authors of the study. Despite great efforts to improve schools and universities, workers in the emerging world are less educated than those elsewhere. Some 35% in China and a stunning 70% in India have no more than a primary education. Yet this will change: China and India, McKinsey predicts, will be the world’s main source for skilled workers over the next two decades. The two countries alone will add 184m college graduates to the global labour market. As a result, the centre of gravity of human capital and innovation is likely to shift towards Asia.

The main story in advanced economies will be the rapidly ageing workforce. Retirements will take 12m college-educated workers out of the labour force by 2030. In many countries the labour force will even shrink. Rapid productivity improvements will be necessary to maintain income growth, particularly in the parts of southern Europe that produce and procreate the least. At current labour-force participation rates, Spain, Italy, Greece and Portugal will need productivity growth of 1.4% a year—more than twice what they managed between 1990 and 2010—simply to keep up recent growth rates in output per head.

Taken together, these developments will lead to big skills imbalances. McKinsey estimates that over the next decade rich countries and China will need 40m more college-educated workers than they will be able to produce. At the same time, employers across the world may find themselves with 90m more low-skilled workers than they need. This glut will drag down wages, worsening inequality.

Governments can mitigate the worst effects, McKinsey argues. Innovation in higher education, such as online teaching, would help raise the supply of skilled workers. Labour-market reforms would increase demand for less-skilled workers, particularly in service industries such as health care. Tax incentives would encourage households to “outsource” household chores to paid workers. Yet in a global labour-market that will be 3.5 billion strong in 2030, competition is bound to be intense and often uncomfortable, for workers and governments alike.