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If 2016 was the year of political earthquakes, then what might the rest of 2017 bring?

Opinion image

In the US Donald Trump begins his presidency. Next door Canada experiences sluggish growth and a weak labor market which will worsen if Trump attempts to renegotiate or pull out of NAFTA. Across the Atlantic, anti-immigration populist movements are gaining momentum in Europe. This is especially critical in France and Germany who have upcoming presidential and federal elections respectively. Adding further complications to the future of Europe is Britain, due to begin Brexit negotiations this year. Changing demographics will continue to impact the labor market, especially in Japan where married women and the elderly increase their labor force participation.

We’ve asked six economists from different countries to offer their labor market predictions for the upcoming year.

Craig Riddell, University of British Columbia
The 15-year resource boom that began in the late 1990s/early 2000s had profound effects on Canada’s economy and labor market that are only gradually being reversed. Accompanying this boom was a steep appreciation of the exchange rate and a shift of labor and capital out of manufacturing and into extractive resources. A Canadian twist on this “Dutch Disease” sectoral shift was substantial regional labor mobility from central Canada to western Canada. Labor markets have evolved quite differently north and south of the border in recent years: Canada’s 2008?09 recession was much milder than the US Great Recession—indeed the mildest in 30 years. Canadian income inequality ratcheted up in the 1980s and 1990s, but has been stable—at a higher level—since the late 1990s, due in part to the resources boom, which raised earnings of low-skilled workers, especially men.

Since the steep decline in the world price of oil and other resources, Canadians have waited for the Dutch Disease to operate in reverse. Despite the Canadian dollar’s substantial decline and increasingly strong growth in the US—by far Canada’s largest export market—the hoped-for revival in manufacturing has yet to materialize. Will manufacturing be Canada’s Godot? And will income inequality now resume its upward march? Adding to concern about sluggish economic growth and a weak labor market is the election of Donald Trump, who was critical of NAFTA (and international trade in general) during his presidential campaign. Restrictions on trade between Canada and the US would harm both countries, but would have a proportionally greater impact on Canada, one of the world’s most open economies and one that trades extensively with the US.

Pierre Cahuc, ENSAE
High unemployment in France will certainly remain the central issue in 2017. Today, the unemployment rate is 10%, and it has not fallen below 7% in the last 35 years. In 2016, the government tried to pass reforms to reduce job protection and to decentralize collective bargaining in order to foster job creation. However, the strong opposition of trade unions, which organized many demonstrations and strikes, led the government to downgrade the scope of the reforms, which will clearly be ineffective at reducing unemployment.

The next presidential election of May 2017 could bring substantial changes. Many French voters are aware that important structural reforms reduced unemployment in Germany and the UK over the last decade. Accordingly, the programs of prominent candidates comprise ambitious reforms of job protection, unemployment insurance, collective bargaining, and vocational training which could significantly improve the effectiveness of the labor market. However, the programs of extreme left and extreme right candidates, who could win the election in the current period of high political uncertainty, are more likely to have strong negative effects on the labor market.

Overall, 2017 is shaping up be a pivotal year for the job market, for better or for worse. Nobody knows yet.

Ulf Rinne, IZA
The German labor market has been in good shape for several years—and, very likely, this will not dramatically change in 2017, even if politicians try their best. Adjustments in recent years did not have sizable impacts on the country’s economic performance, not even the large and bold experiment of introducing a statutory minimum wage. Major risks to the German labor market are thus indeed on the European and global level, including issues such as Brexit, the stability of the EU and the Eurozone, and the return of protectionism. Debates before the federal election scheduled for autumn will nevertheless center on domestic economic and labor market issues. Immigration policy and retirement policy are two critical areas. My fear is that heated discussions will be fueled by emotional concerns and dominated by shortsighted populist proposals. My (small) hope is that evidence-based proposals will be put forward and get a fair hearing. Ultimately, demographic change and technological disruptions are the major challenges for the German labor market in the next decades—and these challenges can only be addressed with sustainable solutions. Rising levels of (perceived) uncertainty and insecurity point to the pivotal policy question: How can a fair balance between individual and societal wealth be achieved?

Daiji Kawaguchi, University of Tokyo
The central issue facing the Japanese labor market in 2017 is whether we will observe an average wage increase. Since Prime Minister Abe took office in December 2012, he has taken measures to rescue the Japanese economy from decades-long deflation. But observers claim that the success of such policies hinges on whether average wages rise. Thus, the current administration seems to have been frustrated by the stagnation of the average wage, despite the low unemployment rate of around 3%. The apparent wage stagnation is, however, largely due to the compositional change of the labor force. The fraction of part-time workers, whose unadjusted wages are about 30% lower than those of full-time workers, has increased significantly, partly because married women and the elderly have increased their labor force participation. The apparent wage stagnation has made the current administration strengthen its state interventions in the historically decentralized wage bargaining system of Japan, asking business leaders to increase wages, increasing statutory minimum wages, and imposing an equal-work, equal-pay principle. This trend will probably continue in 2017, but its effect will be limited, as government orders and legislations tend not to be binding.

Alex Bryson, UCL
In 2017 the UK electorate will wake up to the aftermath of the Brexit vote in June 2016. The effects have been slow to come through but, more than ever, the UK economy will be plagued by uncertainty in 2017. The UK government will be triggering Article 50 of the Treaty of Lisbon in the spring, leaving us with two years to settle the terms for new trading (and political) relations with our erstwhile EU partners, and then with the rest of the world. This is happening against a backdrop of unprecedented sluggish real-wage growth for the last decade or so, tight public finances, and growing labor unrest. Productivity growth is likely to remain stubbornly low, with productivity levels well below those of our nearest competitors. The silver lining is continued high employment rates. Capital flight is unlikely, especially if the City can remain pre-eminent as Europe’s finance capital, and there are encouraging signs that corporations will continue to invest in UK plc—despite everything. Witness recent announcements by Nissan, Google, and other blue-chip companies. The bottom line is there’s all to play for, with a lot hanging on the quality of our political leadership.

Daniel Hamermesh, IZA and Royal Holloway University of London
We enter this year in a nearly unprecedented period of uncertainty about the labor market. The federal minimum wage will certainly not be raised in the next four years, although many state minima will continue to increase, so that geographical diversity in employment protection will increase. The role of overtime laws nationally will diminish, with the effective gutting of the Executive Order raising the pay level below which overtime is automatically paid. Beyond these certainties, an incoming president whose views on labor-market policy are nearly completely unknown makes it difficult to predict what will occur. It may become more difficult for low-skilled immigrants to enter the US, raising lower-skilled natives’ wages a little bit; but I don’t expect any change in the ease of entry of higher-skilled immigrants. The labor market is near full employment, and the last recession ended nearly eight years ago; it is reasonable to expect a hopefully mild recession in the next two years. The unprecedented degree of earnings inequality will not diminish any time soon; and, with the new administration’s tax proposals, one might expect post-tax income inequality to widen still further, with the biggest increase continuing among the very well-to-do.

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