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5 min read
The last few weeks have had some stunning developments with regard to the cost of labor figures, stunning in their quickness and severity. I have to admit, for many months, I bought into the whole transitory inflation argument. The one caveat I had was that inflation could morph into deep-seated corrosive inflation if labor shortages got acute enough to create demand-pull inflation for labor and empower our long beatdown labor unions to stand up. Surprise, it looks like we’re there!
Despite incredible technological advances, labor is still the biggest input when it comes to the price of most goods. The way corporations have gotten around this pesky issue for at least the past four decades was to use free trade agreements and global arrangements worked out for them by politicians of both political parties to ship millions of jobs to low cost, low or no regulatory framework countries. This activity has gone on almost unabated for approximately 40 years as six presidents (24 years Republican and 16 Democratic for those keeping score) supported the policies that decimated organized labor. According to the Bureau of Labor Statistics (BLS), in 1983, the percentage of unionized labor in the wage and salary workforce was 20.1%. In 2020 the figure was 10.8%. It is important to note in the 2020 figures, according to the BLS:
However, the decline in total wage and salary employment was 9.6 million (mostly among nonunion workers), or 6.7%. The disproportionately large decline in total wage and salary employment compared with the decline in the number of union members led to an increase in the union membership rate.
Long story short, the numbers are worse for labor. The main reason the unionized portion isn’t worse year-over-year is because more and more workers fell out of the wage and salary employment numbers in 2020 and most who fell out were not in a union.
There was a time when the Democratic Party was the party of labor. However, after losing Presidential elections by landslides in 1980, 1984, and 1988, the Democrats changed their stripes in the 1990s. Organized labor was already spiraling downward due to a combination of severe recessions, the beginning of “globalizations” and many of their own leadership scandals. In 1992, Bill Clinton figured out how to beat the Republicans. He and his new wing of the Democratic Party essentially abandoned organized labor because they no longer were the same powerful, organized voting block that they had been before Ronald Reagan’s presidency. The Clinton Democrats pulled off a neat trick and essentially, when it came to courting votes and money, beat unsuspecting Republicans by hijacking their corporate donor-supporter list. From 1993 on, organized labor has been relatively unsponsored in Washington, and workers’ wages have stagnated, benefits deteriorated while corporate profits skyrocketed.
Suddenly, however, in the new pandemic reality, for a number of reasons demand for labor has become intense while supply has become scarce. Just this past week, over 10,000 John Deere workers belonging to the United Auto Workers (UAW) walked off the job and went on strike for better wages and retirement plans. Additionally, workers at Kaiser Permanente, Kellogg’s, Nabisco, and Frito Lay are also going out on strike. The latest labor figures from the BLS Job Openings and Labor Turnover (JOLT) report showed that the “Quit Rate," the rate at which workers quit their current job presumably (The BLS presumption, not mine) for the pursuit for a better one exploded for the second straight month. According to the Washington Post:
“Some 4.3 million people quit jobs in August — about 2.9 percent of the workforce, according to new data released Tuesday from the Labor Department. The phenomenon is being driven in part by workers who are less willing to endure inconvenient hours and poor compensation, who are quitting instead to find better opportunities. According to the report, there were 10.4 million job openings in the country at the end of August — down slightly from July’s record high, which was adjusted up to 11.1 million, but still a tremendously high number. This gives workers enormous leverage as they look for a better fit.”
I believe that what we are seeing here is the beginning of the economist (and financial assets) dreaded inflationary wage spiral. Faced with higher cost labor as well as severe material shortages and substantially higher input prices, corporations have a decision to make. How much of this increased cost should they absorb through tighter profit margins and how much should they pass through to consumers of their products? Usually, leaders opt for the easiest answer which, in this case, is to pass the costs on. However, now that labor has figured out their regained leverage and power, higher prices for their members will just lead to greater wage demands to keep up, which will lead to more inflation, more demands for higher wages, and on and on, a spiral similar to the ones we had during our last bout of corrosive inflation in the 1970s.
The Fed will be pressured to try to beat the inflation genie back into its bottle, but there’s a big problem. Financial markets have been inflated through the consistent support from the Fed since the late 1990s. Much of current valuations, especially the hundreds of thousands of “Zombie Companies” kept alive by super-cheap funding, rely on super-low rates. The only real weapon the Fed has to combat real inflation is to remove accommodative policy by raising their policy rate and/or reducing their balance sheet growth by tapering QE. Sharply raising rates (like what is currently being discussed in the U.K.) will hammer risk markets, something the last four Fed Chairmen have been extremely hesitant to do.
However, if they don’t take action to control inflation, then the millions of American retirees, a number that is growing sharply every year with the retirement of the Baby Boomers, lives on a fixed income and has had to try and get by on near-zero interest rates on at least a portion of their savings. Their nest egg, provided they have one, has already been degraded by nearly 14 years of zero or near-zero Fed interest rate policy. The only saving grace, if there has been one, has been relatively low inflation. That seems to be ending now.
We live and invest in interesting times.
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