MEGATRENDSEXECUTIVE SUMMARY

THE TRANSFORMATIONOF LABOR MARKETS
Winners and losers in a new era

Among its many tragic consequences, the pandemic left labormarkets in turmoil. Within a matter of weeks, hundredsof millions of workers around the world saw their income
reduced or disappear entirely.
This immediate crisis obscured four long-term, structuralchanges that were already underway and will ultimately
have a far greater impact on reshaping the global workforce
and economy.
Powerful demographic trends will create a new and highly
differentiated regional map for labor markets
a. The rapid aging and overall decline of workforces inNorth America and Europe is well understood. Whatis less appreciated is the dual aging of companies –
essentially the combination of older, more settled
workers and older companies dampens new businessformation, entrepreneurship and innovation, andincreases concentration in bigger firms.
b. The transition from a demographic dividend to ademographic drag in East Asia and South America will
strain both economic growth and fiscal budgets. The
sharpest reversal will be in China – which is projected toface a contraction in its working-age population between
now and 2050 of well over 200 million – a decline thesize of the entire current US workforce.
c. By contrast, South Asia and sub-Saharan Africa will see
a massive rise in the size of their workforces. However,in many of these countries any potential demographic
dividend is threatened by institutional fragility, poor
business environments, low human capital andclimate disasters.

Structural mismatches between labor demand and supply
are already evident and may be accelerating
Looking ahead, demographic change, the emergence of newtech paradigms and the resurgence of onshoring are creating
an environment where structural labor mismatches will likely
increase.
Two kinds of labor mismatches are especially prominent:a. The ongoing need for plumbers in Australia, renewableenergy workers in Europe and elevated rates of youth
unemployment in China are all examples of education
mismatches. Estimates indicate that almost one billion
workers worldwide have jobs that don’t match theireducation levels.

Exhibit 5 - 1 column

Percentage of overeducated vs. undereducated workers across
select countriesOvereducation

80%

Undereducation

70%
60%
50%
40%
30%
20%
10%0%
Germany

USVietnam

South Africa

Pakistan

Ethiopia

Source: International Labor Organization. Data as of August 2023.

PGIM | EXECUTIVE SUMMARY | THE TRANSFORMATION OF LABOR MARKETS 1

b. There are over 300,000 unfilled nursing jobs inGermany while 1 out of 10 nurses in Brazil isunemployed. This is a prominent example of ageographical mismatch – when both demand andsupply for labor are available but in distant locations.
Geographic mismatches within a country can be equallyconcerning. Almost one-third of US workers relocatedfor a job in the 1980s; that number has fallen to about
5% today.
The complex relationship between technology and labor isentering a new phase
For investors, it is critical to look past hero-villain narratives
and focus on three key aspects of the interplay between
artificial intelligence and jobs:
a. The rise of “weightless” firms has led to a polarizationof jobs and wages. That is, high-paying jobs insophisticated fields like technology, finance and science
are being created along with low-skilled, low-paying jobsin food processing, logistics and personal care.
b. While media headlines about the alarming job
displacement power of new technologies abound,the historical evidence suggests these fears may beoverblown. New technology, in fact, tends to replacetasks and alter work more than replace workers.
c. The next wave of technology - namely, artificial
intelligence - takes automation well beyond the realm of
manufacturing and is now disrupting service industries
like law, finance, health care and education.
Three aspects of downshifting globalization areunderappreciated by investors:
Global labor markets are at a critical turning point. The“golden era” of globalization came replete with outsourced
manufacturing, soaring international trade and complex
multinational supply chains. After several decades ofprominence in the 1990s and 2000s, this era is sunsetting.
There are several aspects of this that are especially importantfor investors:
a. Despite the populist rhetoric, the cross-country
movement of workers has not been impacted as much as
supply chains and global trade.

b. Post-COVID supply chains will lead to new patternsof labor demand, potentially exacerbating labor market
mismatches. The pandemic has led to a barbelling of
global supply chains into (i) more resilient, diversified,multi-regional supply chains and (ii) some “reshored”
supply chains returning to their home markets, either
because of changing economic logic or government
intervention.
c. After an era of increasing returns to capital, a potential
resurgence of labor bargaining power may be on thehorizon in some countries, most notably the US. Against
the backdrop of reduced working-age populations
in many economies, initial indications of this can beseen in the increasing number of strikes and labor
negotiations happening in both the manufacturing andservices sector across the US and Europe.
For investors, the forces reshaping global labor markets will
impact wages, productivity, growth, unemployment, inflationand fiscal deficits – creating a new roster of winning andlosing industries and countries.

International talent has become crucial
Share of foreign-born workforce
U.K.

US

Germany

18%
16%
14%
12%
10%
8%
6%
20072012

2017

2021

Source: U.K. Office of National Statistics , US Bureau of Labor Statistics and Germany’s Federal
Statistical Office. Data as of August 2023.
Note: Aggregate of the five countries (US, Russia, Canada, Germany and Australia) with highest
average net migration 1960 to 2020.

PGIM | EXECUTIVE SUMMARY | THE TRANSFORMATION OF LABOR MARKETS 2

THE TRANSFORMATION OF LABOR MARKETSRESHAPING THE MACRO LANDSCAPE
What kind of impact should investors expect on future inflation, economic growth and fiscal spending patterns?
areas that influence growth potential such as investment,innovation and technological progress. Second, the total
hours worked will likely decline and – unless productivity
rises to compensate – this would also adversely impact
overall growth.

1. The new dynamics of labor markets will likely be
inflationary
In our view, inflationary impulses arising from aging
populations will dominate and most economies will
experience inflation because of their older demographics.
We believe Japan’s disinflationary experience will not be
representative or easily repeatable as globalization has lost
considerable momentum and shrinking national pools oflabor are now more widespread.

3. Rising dependency ratios will strain fiscal budgets,
especially in emerging markets*
Many emerging markets are set to experience rapid aging
and from lower levels of wealth and fiscal strength thanmany developed countries that went through a similar
demographic transition. Those emerging markets that face
the sharpest rise in dependency ratios and currently havechallenging fiscal situations will face the most acute strain
are especially at risk going forward. Our analysis suggeststhat countries like Brazil, Hungary, China, Tunisia andMalaysia may be most vulnerable.

2. The new era of labor markets will dampen growth andgrowth potential
If left unaddressed, countries suffering from shrinking
working-age populations will see a decline in both theirpotential and actual growth rates for multiple reasons.
First, total factor productivity tends to decline with aging
populations. An aging workforce negatively impacts

Countries challenged by high fiscal debt and a rapidly aging population
EMBIGD Countries

Dependency Ratio 2050-2023, (higher = graying faster)

35

Median Dep Ratio

Median Debt to GDP

Already high debt & more dependency aheadChina

25
HungaryBrazil15Tunisia

Malaysia

5-5-15-253545556575852023 Debt as percentage of GDP

Source: Adapted from Perasso and Doppelt, “Greying and Greening Across Emerging Markets,” PGIM. Data as of August 2023.
Note: EMBIGD refers to J.P. Morgan’s Emerging Markets Bond Index Global Diversified.
* The dependency ratio refers to the share of older (65 years and above) and younger (0-15 years) relative to the working age population (16-64 years).

PGIM | EXECUTIVE SUMMARY | THE TRANSFORMATION OF LABOR MARKETS 3

THE TRANSFORMATION OF LABOR MARKETSWINNERS AND LOSERS IN THE
NEW ERA OF LABOR
The structural forces reshaping labor markets will determine the next generation of leaders and laggards across industries andcountries. It has become cliché to say “demographics are destiny.” But for investors, it is critical to recognize that these winners
and losers are not pre-determined – and will depend heavily on the quality of responses and actions by governments and firms.

Winning and losing sectors

expected to be displaced as technological advancement
increases productivity and reduces the need for labor.

Two factors are critical in understanding the impact labormarket changes will have on different sectors:

2. New technology and demographics will drive
employment in leading sectors
Four industries will exhibit strong growth and have thehighest demand for labor going forward. Employment inthese sectors will add 13 million jobs across Europe andthe US. However, with strong demand for labor in newlocations, it may also amplify existing mismatches between
supply and demand for workers with specialized skills.

1. Technology is most likely to displace labor inlagging sectors
Several sectors stand out as being most vulnerable to newwaves of technology disruption. In the US and Europe
alone, over 30 million workers across these sectors are

Employment outlook of future leading and lagging industries in the US and Europe
Employment growth rates above/below national average (2022-2031)-10%

US Average

-5%

5%

10%

Renewable Energy
Senior Care
Chips & Computer Systems
Cybersecurity

Agriculture
Basic Manufacturing"Old" Media & Communications
Administrative Services
-25%

-15%

-5%

EU Average

5%

15%

Renewable Energy

25%

50+%

Chips & Computer Systems
Senior Care

Basic ManufacturingAdministrative Services
Agriculture

Source: PGIM Thematic Research, Brookings Institution, European Centre for the Development of Vocational Training, European Commission and US Bureau of Labor Statistics. Data as of August 2023.
Note: Numbers are based on occupation forecasts by the BLS, the European Centre for the Development of Vocational Training and direct forecast of renewable job growth from the European Commission; see
Appendix for further details.

PGIM | EXECUTIVE SUMMARY | THE TRANSFORMATION OF LABOR MARKETS 4

A framework for investors to assess new labor dynamics by country
To understand how countries are positioned to manage the deep structural changes in labor markets, we have undertaken amultidimensional assessment of each country, focused on:a. Labor supply: the stock and flow of the working-age population, including the net impact of current migration policies
b. Labor quality: the set of skills and education of a country’s workforce and ability to tap global talentc. Policy environment: the extent to which policies encourage well-functioning labor and capital markets

Select leading and lagging Asian countries
Country

Labor Supply
WAP

WAP Change

Labor Quality
Migration

Human Capital Index

Talent Competitiveness

Policy Environment
Productive Capacity

Doing BusinessSingapore
South Korea
Well
Positioned

New ZealandAustralia
Malaysia
Indonesia

Potentially
Challenged

Philippines
Pakistan

Select leading and lagging EMEA countries
Country

Labor Supply
WAP

WAP Change

Labor Quality
Migration

Human Capital Index

Talent Competitiveness

Policy Environment
Productive Capacity

Doing BusinessSwedenSwitzerland
Well
Positioned

United Kingdom
IsraelUnited ArabEmirates
Saudi Arabia

Potentially
Challenged

Italy
GreeceNigeria

Select leading and lagging countries in the Americas
Country

Labor Supply
WAP

WAP Change

Labor Quality
MigrationHuman Capital Index

Talent Competitiveness

Policy Environment
Productive Capacity

Doing BusinessCanadaUnited States
Well
Positioned

Chile
Costa Rica
Colombia
BrazilPotentially
Challenged

Peru
Argentina
Paraguay

Source: PGIM Thematic Research, World Bank, INSEAD and Harvard Growth Lab. Data as of August 2023.
Note: WAP refers to current working age population; for all other definitions see Appendix.

PGIM | EXECUTIVE SUMMARY | THE TRANSFORMATION OF LABOR MARKETS 5

Getting more granular: A state- and city-level perspective
For investors, in particular in infrastructure and real estate, a national perspective may not be sufficient. They may benefit froma more granular view – especially in the case of large countries with diversified economies where winners and losers may varyby region or city.
To shed further light on the trajectory and evolution of labor mismatches over the coming decade, we collaborated with
the Brookings Institution’s Workforce of the Future Initiative. Our research examined which states and cities already haveworkforces in place with skills that best matched the skills of future leading industries – like renewable energy and chip
manufacturing – and could draw investment and most easily transition to them over coming years.

The rise of new industries offers varying opportunities across US states

OpportunityLow

HighSource: PGIM Thematic Research and Brookings Institution. Data as of August 2023.

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