What Did We Learn This Week? (09/22)—The New Labor Renaissance

The US economy escaped yet another supply shock last week as the unions representing rail freight workers agreed to new contracts and thereby avoided strikes that could have virtually crippled the transport of everything from corn to cars. While the avoidance of such a strike is a relief, the incident is another indication that there is a new labor movement in the US that is in its infancy.

The Cornell University Labor Action Tracker reports a surge of labor union activity in recent months. From January 1st, 2021 through September 16th, 2021 there were 150 strikes, From January 1st, 2022 through September 16th 2022 there has been 273. That is a tidy 82% y/y increase.

Wage inflation has been a long time coming to say the least. According to the US Department of Labor, real median hourly wages increased at an anemic .2% pace in the forty years from 1979 to 2019. During that period, referred to by economists as The Great Moderation, labor availability soared as the baby boomers entered the workforce and globalization surged with the collapse of the Soviet Union and the integration of China and cheap Chinese labor into the global economy. The outstanding economist Peter Boockvar recently pointed out commentary from the CEO of ABM Industries that illustrate just how difficult the environment in for companies in labor intensive businesses,

“The labor pressures we are currently experiencing are largely unprecedented. With unemployment at historically low levels, immigration greatly reduced from prior years and with high demand from the rapidly recovering travel, restaurant, retail and service industries, labor shortages are driving labor inflation. We are seeing wage pressure in both blue collar and white-collar positions and a real battle for talent. We expect these challenges will persist into 2023. In this environment, we'll remain vigilant on pushing through price escalations, managing costs and developing systems, programs and processes to operate more efficiently and to effectively attract, retain and manage talent."

The days of labor abundance are clearly now behind us. The demographics simply are what they are. Nick Eberstadt’s new book “Men Without Work” goes into great historical detail to make the case that the post-pandemic great resignation is an extension of a multi-decade trend that informs us that the early retirees are not coming back. Just how tight is the labor market? Well the Fed has now raised interest rates 300bps and we have yet to see any indication of a softening in the labor market. I realize unemployment is a lagging indicator, but I still find it extraordinary that weekly jobless claims are basically flatlined at the bottom the chart.

All of this sets the stage for a new era that will bring about a re-emergence of organized labor and an emergence of labor activity into sectors of the economy and US geographies that had never seen an empowered labor force. The success of the rail workers will be wind in the sails of labor organizers. The rail unions achieved an immediate 13.5% immediate wage bump which will grow to a 24% increase by 2024 as well as winning improvements in working conditions and medical time-off.

So what does all of this mean to the US economy and inflation? Well, it obviously isn’t going to help the Fed achieve their objective of slowing wage growth. With wages spiking but still below headline inflation, it would appear the Fed is truly behind the curve. The more important question is the long-term impact. According to Gallup, the approval rating for labor unions is at the highest since 1965 so it isn’t surprising to see unions again garnering increased political support. That polling also suggests that there is a powerful tailwind for unions to increase participation. The bottom-line is that wage push inflationary pressures are secular, not cyclical. Labor’s share of income has been slowly rising in recent years but remains historically low. That is set to change and it will come at the expense of corporate earnings and higher interest rates.

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Tim Pierotti is WealthVest’s Chief Investment Strategist. 

Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.

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