Rich Countries Are Becoming Addicted to Cheap Labour
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Rich Countries Are Becoming Addicted to Cheap Labour

Businesses are relying more on migrant workers as labor shortages persist, but economists warn of long-term dangers

By TOM FAIRLESS
Mon, Mar 4, 2024 8:40amGrey Clock 7 min

As migration hits record levels worldwide, a debate is building among economists over whether some industries are becoming too dependent on foreign labor.

Many business owners say that bringing in low-skilled foreign workers has become essential, as local populations age and labor forces shrink. In rural Wisconsin, John Rosenow says it is impossible to find locals to work on his 1,000-acre dairy farm. He relies on 13 Mexican immigrants, up from eight to 10 a decade ago. That has enabled him to avoid making costly investments in robots that can help milk cows, as some other dairy farmers have.

“We get really good people,” Rosenow says. With immigrant labor, “I’m pretty sure if I wanted to double employment, I could get it done within a week.”

To some economists, however, dependence on imported workers is approaching unhealthy levels in some places, stifling productivity growth and helping businesses delay the search for more sustainable solutions to labour shortages.

Those solutions could include bigger investments in automation, or more radical restructurings such as business closures, which are painful but may be necessary long-term, these economists say.

“Once industry is organised in a certain way and the structure encourages employers to recruit migrants, it can be very hard to turn back,” said Martin Ruhs , a professor of migration studies in Florence, Italy. “In some cases, policymakers should ask, does it make sense?” said Ruhs, who is also a former member of the U.K. Migration Advisory Committee, which advises the British government on migration policy.

The debate is likely to heat up further as Western societies teeter closer to a demographic abyss . For the first time since World War II, the working-age population is shrinking across advanced economies. The European Union’s working-age population will shrink by one-fifth through 2050, according to a recent report by German insurer Allianz .

There are ways to offset that trend, such as encouraging older workers to delay retirement. But importing foreign labor is often the easiest option, given the supply of available workers in places such as Latin America or Africa.

Immigration also provides a rush of economic growth as migrants boost populations and spend money, even when it elicits blowback from conservative groups, as it has in the U.S. and Europe.

Immigration is now running two to three times above pre pandemic levels across major destination countries including Canada, Germany and the U.K. In the U.S., 3.3 million more migrants arrived than left last year, compared with a 2010s average of around 900,000.

Three-quarters of farmworkers and 30% of construction and mining workers in the U.S. today are migrants. Overall, immigrants made up 18% of the U.S. workforce in 2021, compared with 16% a decade earlier, according to the Organization for Economic Cooperation and Development, a Paris-based club of mostly rich countries.

Despite promising for decades to curb immigration, the U.K. has seen a surge since its 2020 exit from the EU, as businesses scramble for employees. More than 27% of the National Health Service’s nurses are from abroad today, up from around 14% in 2013. In Germany, roughly 80% of slaughterhouse workers are migrants, unions estimate.

Downsides of over reliance

Increased reliance on low-skilled imported labor can lead to weaker productivity growth, which ultimately determines how fast economies can expand, some economic research suggests.

A 2022 study in Denmark found that firms with easy access to migrant workers invested less in robots. Research in Australia and Canada suggests that migrants could keep weak firms alive, weighing on overall productivity.

Labour productivity growth has been sluggish across advanced economies in recent years. In the U.S. and U.K. farming sectors, productivity has flatlined for a decade or longer. In Japan and Korea, which have more restrictive immigration policies, it increased by around 1.5% a year, OECD data show.

Finding the right balance between allowing some migration, which can help restore dynamism in ageing countries, and avoiding over dependence is hard. In many industries, there is no obvious alternative to foreign workers.

Going cold turkey would send prices for products made from migrant labour higher. It would also leave many people in poorer countries with fewer options to pursue better lives.

Anna Boucher , a global migration expert at the University of Sydney, says that some low-skilled migration is probably necessary in the short term due to skills shortages. Without it, some childcare services in Australia would shut down and vegetables would die in the fields.

Economic research suggests that an influx of high-skilled migrants, such as scientists and engineers, can actually lift firms’ productivity and boost local workers’ wages and employment opportunities.

Economists are more divided when it comes to lower-skilled migrants. Such workers are also more easily replaced, including in industries that seem unlikely candidates for automation.

In the Czech Republic, some farmers are using artificial-intelligence-driven robots to monitor and harvest strawberries. Israeli startup Tevel Aerobotics Technologies has developed fruit-picking drones. Fieldwork Robotics, a U.K. company, recently started selling raspberry-picking robots, which stand 6 feet tall with four plastic arms.

Yet for governments, pursuing reforms that boost productivity and allow weaker firms to die is a lot harder than increasing immigration, said Dan Andrews , a productivity expert at the OECD.

“Some countries may have taken the easy way out,” he said.

Pushback from businesses

Hoping to accelerate automation in agriculture, the U.K. government is pouring money into farm technology. It is also considering abolishing rules that allow companies to pay migrant workers 20% less than the going rate for jobs, prompting protests from farmers’ lobby groups. They say farmers adopt technology quickly if it is available, but that robots are no good at picking fruit and vegetables.

“The technology that we are aiming for is five years away…we were saying that five years ago,” said Martin Emmett , a farmer and official at the National Farmers’ Union, a trade group.

In Malaysia, the government last year announced a freeze on hiring of new foreign workers. Government ministers say that over dependence on cheap foreign labor has created a detrimental cycle that allows companies to resist innovation. Local companies say they need more time to invest in automation and upgrade workers’ skills.

Some industries, including manufacturing and plantations, have since been allowed to hire foreigners following appeals, but the broader freeze on foreign workers remains in place with no end date.

In Canada, economists say the government has cast aside a carefully managed immigration system that gave priority to highly skilled workers, and ramped up significantly the intake of foreign students and other low-skilled temporary workers. By flooding the market with cheap labor, Ottawa may be propping up uncompetitive businesses and ultimately damaging productivity, according to a December report co-written by former Canadian central-bank governor David Dodge .

Economic output per capita is lower than it was in 2018 following years of record immigration, notes Mikal Skuterud , an economist at Waterloo University in Ontario. Canada has been bringing in so many low-skilled workers that it lowers the country’s productivity overall, he says.

Germany’s butcher conundrum

The debates are also intensifying in Germany, where businesses including butcher shops in the foothills of the Black Forest are becoming more reliant on imported labor.

Young people don’t want to train as butchers anymore, local businesses say, because it is unglamorous work, with low pay. Labour shortages are one reason why the number of butcher shops has roughly halved over the past two decades.

Three years ago, Handirk von Ungern-Sternberg , an official at the local chamber of handicrafts, started a pilot project to recruit butchers’ apprentices in India, taking advantage of a change in German law that made it easier to hire low-skilled workers from outside the EU. The first batch of 13 young Indians arrived in September 2022.

Now, demand is exploding. Von Ungern-Sternberg plans to bring in roughly 140 Indian workers this year. That number could triple in future, he says.

From auto mechanics to construction, local businesses are clamouring for his young Indian recruits. Chambers of handicrafts across Germany, from the Alps to the North Sea, are seeking his help in starting similar projects.

Butcher shops in Germany’s Black Forest region are becoming more reliant on imported labor. PHOTO: DOMINIC NAHR FOR THE WALL STREET JOURNAL

“We ask ourselves, where’s the limit? Are we a job company? We don’t know where the ceiling is,” von Ungern-Sternberg said.

The program also benefits consumers by helping keep butchers’ costs low. Across the border in Switzerland, where Indian workers aren’t available, meat costs nearly four times as much.

However, Swiss business owners have also been experimenting with new technologies, including sausage vending machines known as Wurstautomaten, which could reduce the need for small-scale butcher’s shops and ultimately help bring prices down.

Meanwhile, opposition to immigration is rising in Germany, which suggests the butchers’ reliance on imported labor might not be sustainable. Support for the anti-immigrant Alternative for Germany party recently hit an all-time high of 23%. Polls suggest it could emerge as the strongest political force in several German state elections later this year.

Dairy dilemma

In Wisconsin, Rosenow, the dairy farmer, says he’s skeptical of the automated milking machines that he says are advertised in farm magazines. Some neighbours experimented with robots but went back to human labor because the robots constantly needed repairs, he says.

Robots would also cost twice as much as immigrant workers and be costly to maintain, Rosenow says. With immigrants, “labor is no constraint.”

Onan Whitcomb , a dairy farmer in Vermont, disagrees. He says that when he wanted to increase production he decided not to hire immigrant workers. Instead, he spent $800,000 on four Dutch-made milking robots.

Milk production per cow has grown by 30% and the incidence of mastitis, an inflammatory disease, has declined by 80%, he says, meaning less spent on antibiotics. Whitcomb says he was able to cut 2.5 jobs, and the investment paid for itself in seven years.

“We were milking 300 cows and we went to 240, and we still made more” milk, Whitcomb said. “That’s hard to beat.”



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Worried About a Stock-Market Correction? Here’s How to Lock in Recent Gains

The best course when stocks slide is for investors to stand pat, but ‘put’ options are one way to hedge against a drop and lock in some profits

By DAN WEIL
Wed, May 1, 2024 5 min

The past five years have been good to stock-market investors. The S&P 500 index has climbed an annualised 12% during that period, outstripping the 9% annualised gain over the past 40 years. This year alone the index is up 6.9% as of April 26, tacking on to the 24% gain in 2023.

But signs are emerging that the stock market could be due for a breather. As of April 25, the S&P 500 went 133 trading days without a decline of at least 10%, according to PNC Institutional Asset Management. To be sure, that’s still short of the 172-day average since 1928. But the S&P 500 has jumped 24% in the past six months (about 180 days), which buttresses arguments for a correction.

What’s more, the multiyear ascent has arguably sent stocks to overvalued levels. The S&P 500’s forward price-to-earnings ratio—a gauge of market valuation based on earnings estimates for the next 12 months—registered 20 as of April 26, exceeding the five-year average of 19.1 and the 10-year average of 17.8, according to FactSet.

“A correction is certainly possible,” says Jack Ablin , chief investment officer at wealth-management firm Cresset Capital, pointing to the high valuations and the prospect that rate cuts will come later than expected thanks to inflation that has been higher than expected.

Given the danger of a stock-market correction, commonly defined as a 10% to 20% drop, how can investors guard the profits they have made in recent years?

Wait and see

Assuming you have a well-diversified portfolio and aren’t counting on the money from your stocks to finance an imminent expense, financial advisers say the best strategy is to hang tight.

Corrections generally don’t stick around long. Since 1985, declines between 10% and 20% for the S&P 500 have lasted only 97 days on average—three-plus months—according to a CFRA analysis of S&P data.

It then has taken the market an additional 101 days on average to recover the ground lost during the correction. So in about six months, investors tend to be back where they were before the correction.

“If there’s a shallow correction of 5% to 10%, we recommend riding it out,” says Karim Ahamed , an investment adviser at wealth-management firm Cerity Partners. “Eventually the market recovers. The idea of selling out and climbing back in is difficult to achieve. You’re more likely to stay on the sidelines with your losses crystallising.”

The S&P 500 did fall more than 5% in recent weeks, from March 28 to April 19.

Sell losers

Some people, though, simply find it impossible to do nothing if they fear a correction is looming. At the least, they want to protect the gains they have earned so far. What’s the most prudent way for them to reduce their market exposure?

Keep in mind that most actions you can take to guard your stock profits carry a cost. The easiest method, selling stocks, subjects you to capital-gains taxes unless you are selling from a tax-advantaged retirement account. That tax rate varies according to your income, but will likely be 15%.

One way to limit the burden is through tax-loss harvesting, says Amanda Agati , chief investment officer of PNC’s asset-management group. That is when you sell stocks at a loss, lowering your net capital gain. If you have any dogs in your portfolio—stocks with poor fundamentals—you can unload those.

If you do sell stocks, you could put the proceeds into a money-market fund for now, financial pros say. Many such funds yield 5% or more, far higher than rates over the past 15 years. Or if you want to increase the safety of your overall portfolio, you could put the money into safe government bonds. Three-year Treasury notes yield around 4.75%.

Play defence

If you are going to unload stocks, but don’t want to sell right away, you can put in a stop-limit sell order through your brokerage. That order can automatically sell your shares if they slide to a level you designate (they can go below it, too), protecting you from big drops.

Say you bought 100 shares of Tesla at $140, and they are now trading at $165. If you don’t want your profit to disappear in a downturn, you could enter a stop-limit sell order with your brokerage at $150 for some or all of your shares. Those shares can be sold if the price reaches $150, securing some of the gains.

You also might shift your holdings more toward defensive stocks, such as utilities and consumer-staple companies, which generally outperform during market downturns, says Michael Sheldon , executive director of wealth-management firm RDM Financial Group.

PNC’s Agati suggests an emphasis on quality stocks, those with high recurring revenues, strong and dependable profit margins, high cash flow and low debt. These stocks—such as AutoZone and Visa , she says—have lagged behind the leaders of the market’s surge over the past year.

Consider options

Advisers also suggest looking at “put” options to protect your stock gains. Puts give you the right but not the obligation to sell a security at a preset price by a preset deadline.

Note that we’re talking about a risk-reduction approach here, not the kind of risk-taking—to try to amplify returns— that has been rampant in the options market . The simplest strategy could be to purchase a put option on a market-index exchange-traded fund, such as one based on the S&P 500. You could buy puts on individual stocks rather than an index ETF, but that may get expensive and complicated as each option carries a purchase premium.

Here’s how the ETF strategy would work: First, buy an option that would let you sell the ETF at a price below the current one, protecting you from declines beneath that level. You wouldn’t have to sell the ETF, and you wouldn’t even have to own it. As the S&P 500 falls, the put option gains in value, and you can sell it.

Say on April 16 you wanted to protect 100 shares of SPDR S&P 500 ETF Trust (SPY) from a decline of more than 10%. With the ETF trading at $505 a share, you could buy an option that covers 100 shares for $1,050, or $10.50 a share. You’re paying a premium equal to 2% of your position.

The option’s expiration date is December, and its strike price is $455 a share, or 10% below the current value. The strike price is the price at which you could exercise the option. But generally you sell the option rather than exercising it, so you don’t have to dump any shares, especially if you don’t own them.

If the market doesn’t go down 10% by December, you let the option expire worthless, and you’re out the $1,050 you paid for it. If the market drops more than 10%, you can sell your option at a profit whenever you want until December.

While it might be more lucrative to sell it early, Ablin recommends holding until expiration if you’re using the option to protect your portfolio. “Think of it like homeowner insurance,” he says. “You pay a premium, like a deductible for insurance, and your coverage runs for a term.”

Keeping the option until expiration extends your coverage for the longest possible period.

By using options, you don’t have to sell any of your stocks, which are typically the best asset to generate strong long-term returns. “If you have the wherewithal to hold the S&P 500 for 10 years, your odds of making money are over 90%,” Ablin says.

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