We’re nearing the end of earnings season and a key theme is emerging – layoffs. There’s been a big number of job cuts across a range of sectors in the US and Europe including tech, media, finance, and retail.
Citi announced it will cut 20,000 jobs this year, Amazon is planning to cut hundreds in its Amazon Prime Video unit, and even Microsoft is cutting 1,900 jobs at its Activision business.
In Europe, SAP, the German software company, is planning to trim 8,000 jobs. And back in the UK, Sky is planning to cut 1,000 jobs, Tata steel is going to close its Port Talbot steel plant and Lloyds Bank is closing more branches, cutting 1,600 jobs.
These job cuts are coming at the same time as labour markets are staying historically tight. The US created over 350,000 jobs in January and the UK unemployment rate is only 4.2%. A strong labour market has been a key feature of the post-pandemic economic recovery.
And as we move through 2024, the labour market is going through changes, but what could this mean for the global economy?
Is AI taking over the labour market?
One way of understanding the puzzling labour market picture is to look again at SAP.
SAP reported strong profits and cash flow for 2023 overall, beating forecasts. Total revenue was €31.2bn for 2023, cloud revenue grew 25% in Q4, and its share price reached a record high on the back of these results.
But at the same time as announcing a stellar 2023 earnings report, it also announced 8,000 job losses as part of its transformation programme.
The reason for the layoffs? According to SAP, it’s down to artificial intelligence driven efficiencies.
It’s worth mentioning that SAP is offering employees the chance to re-skill, so might not impact headcount as much as the headline figure suggests. However, it does highlight the employment changes that will be needed as businesses operations evolve with AI.
The International Monetary Fund (IMF) found that 40% of global employment is exposed to AI. However, this rises to 60% in developed economies, and the bulk are high-skilled jobs.
Of that 60% of jobs the IMF thinks could be impacted by AI, roughly half might be enhanced by AI. In contrast the other half could see AI doing tasks currently done by humans, which could cut demand for labour.
AI could be a trend that gains speed in the next few years. The IMF research makes some interesting observations.
Firstly, developed markets are more prepared and ready for AI, which makes sense since they’re also expected to see the biggest impact on their labour markets. Secondly, AI could affect income and wealth inequality in countries.
The IMF thinks younger workers might find it easier to exploit AI opportunities, while older workers could find themselves struggling to adapt.
It could also hit wage growth. AI might complement high income workers in two ways. First, if high-income workers harness AI better than other wage brackets. And second, if it boosts productivity, this could also boost capital returns.
Since most wage data is based on averages, the difference in income caused by AI might not be obvious right away – i.e. average wage growth could still rise, even if pay levels for lower income workers are falling. This could have an impact on future inflation dynamics and on monetary policy.
How has the labour market changed post pandemic?
AI could dull demand for highly-skilled workers. But it’s worth noting that labour markets recovered rapidly after the pandemic, and in a lot of countries even with recent layoff announcements, jobs are plentiful and available workers aren’t.
Analysis from the Bank of International Settlements (BIS) found widespread tightness in labour markets and multiple factors leading to labour demand outstripping supply, including demographic shifts.
Compared to the 2010s, working age population has grown slower in the post-pandemic era, along with worker preferences to working fewer hours.
The BIS analysis also found European workers are reporting more autonomy and influence over their decisions. Three quarters of workers are also finding it easier to arrange taking a few hours off during the working day for family or personal matters. This is a 15% increase compared to the period before the pandemic.
So, the nature of work has changed since the pandemic, which is having a lasting impact on the labour market.
On the demand side, the BIS thinks some companies could be hoarding employees. They’re doing this because the labour hiring environment is so shaky, and the demand for labour is coming from sectors of the economy that workers shunned during the pandemic.
The BIS points out that rotations in post-pandemic consumption patterns has led to greater demand for labour in ‘contact-intensive’ service sectors, including recreation and accommodation/hotels.
Service sector jobs tend to have longer, more anti-social working hours and need face-to-face contact with the public. If other sectors are offering better work/life balance and more flexibility, it’s understandable why the labour market is tight, particularly for service sector employment.
The future of the labour market
There’s tension in post-COVID-19 labour market dynamics. On the one hand there’s a smaller working age population, and an excess of jobs in the service sector. But workers don’t seem to want these jobs. The post-COVID-19 employee prefers flexibility, which is more common in highly skilled sectors, which in future might see lower demand for workers due to AI.
Looking ahead, it’s likely something will have to give. It looks likely that AI could cause a major storm for highly-skilled workers. Already some companies with the most coveted jobs have announced cuts as AI transforms their labour needs.
As we move into 2024, the developed world has an excess of low-skilled job vacancies. However, in the near future it might have an excess of highly-skilled employees.
How this dynamic plays out in the coming months and years is still to be seen. But it will transform the global economy and the job market of the future, and this will impact investors.
This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice.
Kathleen Brooks is the Founder of Minerva Analysis, a market analysis company. Hargreaves Lansdown may not share the views of the author.
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