The labour-market data hole that threatens to skew monetary policy

Global labour markets are embarking on a period of significant change. While it is tempting to be seduced by the shiny new toy of AI, this is just one adjustment that has to be accommodated. This current period of dramatic structural upheaval means that economists have a diminishing understanding of labour markets in real time. That veil of ignorance increases the risk of central-bank policy error and raises challenges for governments’ tax-raising abilities.

Most labour force data depends on survey-based evidence. Few people are inclined to fill in surveys nowadays. Collapsing UK response rates explicitly caused the UK to stop publishing its labour force survey results. US establishment survey response rates have plunged precipitously. Data reliability wobbles on an increasingly narrow – and rotten – foundation.

The declining survey quality serving traditional labour market data highlights another problem. As technology reduces barriers to entry, self-employment and side hustles are becoming more common. A retailer occupying an expensive physical space is almost an anachronism in South Korea or the UK; online retail has fuelled a sole-proprietor business boom. Social media influencers receive a larger share of the global advertising revenue than will newspapers and radio combined, yet no country lists “TikTok content creator” as a job. Reliable household surveys might possibly capture such employment, but surveying businesses gives little indication of the economic power possessed by a 15-year-old with a smartphone and nice dance moves.

Ageing societies produce further measurement problems. Within a few years, half of the world’s GDP will be generated by economies with declining populations. The OECD’s website declares the working age population as “the share of 15- to 64-year-olds in the total population”. The IMF adopts a similar approach.

This definition is not even remotely how the modern world works. The International Labour Organization (ILO) has a broader “above 15 years old” definition, but coyly admits “some countries also apply an upper age limit”. Defining labour force participation as abruptly ending at 65 years of age defies the (sensible) trend of later retirement. Working-age populations are larger than reported.

Moreover, perfectly healthy retirees rarely embrace a catatonic life in front of daytime television. People past retirement age can contribute to economic activity, either through paid employment or volunteering. In Japan, childcare is increasingly the responsibility of the retired generation – roughly half of all caregivers are over 60. Volunteering outside of the family is more prevalent among older people. Such economic value creation exists outside of the mindset of the century-old “output economics” model represented by GDP.

While such developments have the appearance of novelty, in reality much of this is a return to traditional economic forms. Side hustles are hardly new – the 19^th-century middle-class household with “paying guests” was the Airbnb of its day. The traditional family model often placed childcare into the hands of the older generation. It is just unfortunate that so much of the economic data we use today was created in the heyday of the output economics characterized by the Fordism model, which focused on manufacturing, in large companies, with a person’s income dominated by earnings from a single job.

The inability to measure the evolution of labour markets has some serious consequences. Most significantly, there is an increasing risk that data will under-report the strength of household incomes and balance sheets. If employment data is not capturing the side hustles, then the spending power of consumers will be understated – which risks policy-makers making unnecessary accommodations, potentially pushing inflation higher.

The profit and labour shares of GDP may become warped by the rise of self-employment, with sole proprietors paying themselves a minimum wage and periodic dividend payments (often something that is incentivized by tax structures). This again distorts the perception of household income and may give misleading signals as to its distribution. There is a perception that profits are earned only by capitalist caricatures – Scrooge McDuck bathing in gold coins. That faulty assumption might be exaggerated by a rising profit share of GDP, fuelling political populism. Listed equity ownership is skewed to higher income groups in many countries, but profit shares in an economy are more democratically owned. Failing to realize this may misdirect policies that attempt income redistribution.

Similarly, depending on fiscal structures, it may be more tax-efficient for a self-employed person to save as a company rather than as a household. This can give a misleading impression of the resilience of consumer balance sheets. For all practical purposes, the savings held on the corporate account are accessible to the household in time of need.

Households that have moved to a portfolio of income streams, rather than depending on a single job, may be less vulnerable to the fear of unemployment. Precautionary savings, the cash held in case of a “rainy day”, can be affected by this. Consumers can fall back on alternative income streams as their safety net in the event of losing a job, rather than depending on accumulated savings. However, underemployment may also become more prevalent as an economic issue – the self-employed person who is idle two days a week, rather than a company firing 40% of its staff. Productivity – everything economists do not understand condensed into a single statistic – becomes increasingly haphazard when underemployment is under-reported.

The spare capacity of the labour force may be underappreciated. Demographic changes render a lot of spare capacity measures obsolete, and the rise of volunteering means that economic activity can be accomplished outside of the recorded economy.

All of these shifts increase the risk of monetary policy error. They also present challenges for fiscal policy, if tax collecting does not adapt to the new way of working. The rise of social media influencers as advertisers may push more advertising income into the hands of people who do not pay tax, or who pay a lower rate of tax than more conventional advertising platforms. The tax efficiency that shifts the income and savings of the self-employed away from a salary naturally means less revenue for the government, if left unchecked.

Employment and its associated social status will become ever more politically sensitive as economic change accelerates. Policy-makers and economists need to engage in a better dialogue with people in the real economy, to fill the increasingly large gaps in official employment data.