What lies ahead?

Benj Gallander and Ben Stadelmann
Friday, October 29, 2004

In his book, Fortune Favors the Bold, the MIT economist Lester Thurow recognizes three revolutions occurring today. One: new technologies are producing a third industrial revolution, moving the world into a knowledge-based era. Two: communication technologies are creating a global economy where corporations are free to roam the planet, buying where expenses such as labour are cheapest and selling where it is most profitable. And three: for most of the world, capitalism is replacing socialism and communism.

Whether society will be shaped — not just can be shaped — is a valid concern for Thurow and others. Uncertainty and inequity are par for the course in capitalist economies, a bitter pill for many. Thurow says insecurity is necessary to be a technological leader: investments in new technologies only pay off if productivity is improved and costs reduced. That often puts people out of work.

Meanwhile, these revolutions are altering the chemistry of the labour market. In 2002, US productivity growth accelerated to 4.8 percent annually; but for employment to have risen, total output would have had to speed ahead even faster. With GDP growth of just half that rate, at 2.4 percent, the half-empty part of the glass was manifested in job losses of 2.4 percent. In 2003, despite better economic growth, job losses continued.

Thurow wants macroeconomic policies to ensure productivity gains translate into national gains in employment. Wishful thinking on his part; that conundrum has been around longer than the Luddites.

Today a small group of workers has emerged to become more valuable and secure than ever, while a much larger number of others are experiencing tough job competition and income volatility. Thurow spells it out clearly: “Wages are not going to rise smoothly over a working lifetime and peak right before retirement. For male college-educated workers the peak earnings that used to occur between 45 and 55 years of age now occur between 35 and 45 years of age. Experience is less valuable; having the latest skills is more valuable. Older workers face falling wages.”

What a downer! To say the least, this has profound implications for individual investment portfolios. Financial planning has always focused on conforming to a life-cycle view of wealth accumulation that progresses in strict phases. It assumes continuous and increasing income as one works, starts a family, buys a house, finances a child’s education, etc. — you know the drill.

Advisers are going to have to learn to be more flexible in their thinking and pay close attention to what is happening in their clients’ lives, rather than what a textbook or table indicates “should” be happening.

Risk tolerance must now be assessed more comprehensively and with greater frequency. Assumptions and attitudes about consumption, production, job security — and even reproduction — are becoming more complex. Sheesh, maybe our kids will be retired before they get married.