Will the Baby Bust Reduce Inequality? (Part 3)

Undermining Demographic Inequality

Could inequality actually fall?  Many commentators, and not just in Europe, predict that inequality will continue to rise, because technology will only further the process of rising returns to those will technological, managerial, and entrepreneurial skills.  Instead of distributing the gains of economic development broadly to the population, markets will increasingly channel the gains to those who have the skills most in demand.

Those predictions, however, calculate this skills-based change without attention to demographics – and demographics matter enormously.  Already by 1997, Peter Drucker called for greater attention to demographic changes, which foretell “the future that has already happened.” Similarly, Clayton Christensen, adapting a hockey metaphor, famously urged us to focus not on current situations but to “skate to where the money will be.”  In that spirit, let’s see whether demographic decline could be good news for overcoming inequality.  

Inequality involves two kinds of variables: quantitative differences in wealth and income, and qualitative differences in status.  Americans tend to focus on the former, but both matter, because both bring power.  That’s why, for example, an educated young Italian man would come to the United States for his career, even though Italian monetary inequality is actually lower.  Status differences are still so strong in much of Europe, and convey so much power, that American economic openness outweighs the higher monetary inequality.

Europeans built up strong status differences because they’ve had a large population for a long time.  Unlike Americans, they filled up their continent centuries ago.  That’s also partly why unemployment in Europe has generally been higher than in the New World.  In America, ordinary young people without social connections can pursue crazy dreams and succeed – and they’ve done more of that since the pandemic.

Inequality in both dimensions rises in many situations, but especially when there are too many people around to share equally.  The early European settlers of Virginia, for example, wanted to become landed gentry like their kin back home. But they couldn’t attract tenants to their land – the tenants could just go inland and get land for themselves. Eventually those would-be tenants, descended from peasants, even had the gall to demand the right to vote out their betters in elections.

Fast forward to the 20th century, and groups with power manipulate hiring and retention to favor people like themselves, including by social class.  When companies have fewer good jobs than capable people, then hiring managers can readily discriminate against potential recruits who don’t match their background.  If the balance shifts, then HR departments start to worry their organizations won’t survive without accepting whatever talent they can get.

That’s partly why Irish, Italian, Jewish, and Asian Americans eventually prospered, even “became white,” despite intense initial bigotry from Anglo-Saxons.  Employers were so desperate for employees at prevailing wages that they overcome their prejudices.  Likewise, temp agencies say they now consider applicants whose background used to disqualify them – people without little education, or minor criminal offenses.  Already labor shortages are pushing companies to drop requirements for college degrees.

Snobbery, chauvinism, racism, and bigotry are still prevalent, and have many causes.   But with less economic leverage for people to discriminate against others, these barriers should weaken.  Even the much-maligned construction industry is likely to become more egalitarian, despite its resistance to automation.

Demographics aren’t everything – after all, white-dominated states in the southern U. S. maintained Jim Crow restrictions against Black people even as these ran against their economic interest.  But as the historian Gavin Wright has shown, the restrictions continued as long as the South had a self-contained labor market.  When many Black families migrated north after World War II, Jim Crow eventually crumbled – of course, the Civil Rights movement was also crucial.

With the current backlash against “wokeness” in DEI programs, some companies will persist in bigotry, and perhaps even present that bigotry in subtle ways for marketing advantages.  We’re certainly seeing that in politics.  But most companies seem to be moving in the opposite direction, eager to diversify their ranks, so any ideological opposition to diversity will be in niches.  Already we’re seeing more arguments that diversity and inclusion are in a company’s commercial, not just moral, interest.  Companies are giving an added boost to diversity programs to help address the worker shortage.  It’s vital to “winning the war for talent.”

If companies don’t come around, then most of those talented people excluded by discrimination will eventually become entrepreneurs and gig workers, outcompeting the big companies with mediocre talent.  Increasingly they’ll know their value.

Some say this won’t happen, not just because whites will fight a rearguard action, but also because the communities with higher birth rates (such as Mormons and Orthodox Jews) tend to be more conservative and exclusionary.  But modern life demands so much coordination beyond communities that it’s more likely these communities will drop their biases in organizations outside their communities.  Privately held companies, of course, are another matter, though these will struggle to discriminate if it means they lack talent for large projects.

Another counter-argument is that if the labor supply falls, so will economic activity.  Aging societies buy a lot less than youthful ones.  And plentiful labor, just like plentiful capital, encourages companies to launch and expand.  Shortages of labor will therefore vanish as companies react to falling demand.  That’s likely in the long run, but we should have a window of time (perhaps even now) when demand still outstrips the workforce.

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American companies are still investing in diversity and inclusion, and that’s all to the good.  The demographic trends described here will take at least several years to kick in.  But let’s also keep an eye out to the economy we’re likely to face when the current baby bust plays out.  We’ll have our hands full dealing with the downsides: slower growth from aging workforces and inflation, intergenerational fights over retirement spending, and lower rates of innovation.  We’ll have fewer resources for fighting inequality, all the more reason to hope it falls in this decade.