Fed Up?

Between October 2021 through March 2022, there were more than 1,000 petitions seeking union representation, which was up over 50% from the prior year. One important grassroots case involved Amazon’s Staten Island warehouse, home to over 8,000 employees, which won the right to unionize. Amazon employs over 1 million workers, and additional Amazon facilities are now considering whether they should follow suit. Employees at other large tech firms such as Google and Apple are organizing, with Google workers having formed the first large tech union in January 2021. Outside of tech, Starbucks has more than 200 locations seeking to unionize, several of them successfully. To combat the inroads of the labor movement, Starbucks announced the suspension of buybacks in order to reinvest in its labor force and stores.

Union activity has increased, with strikes winning significantly higher concessions from employers than has occurred in the recent past. For example, Deere union members initially rejected a 10% wage increase for an eventual 20% with signing bonuses. Kellogg’s employees went on strike and negotiated a 15% wage increase that was initially proposed at 3%.

Could these be harbingers of a societal shift in the leverage workers have to dictate the terms of their employment? So far, companies have been able to combat higher wages and commodities inflation by raising prices; but if labor costs continue to climb greater than expected, profit margins of companies and industries may start to be impacted across the board.

Union membership has been in steady decline since the early 1980s (Chart 1) and now stands at 10% of the population. For privately held corporations, union membership is a paltry 6%.

Graph showing decline in labor union membership

Chart 1. Source: Bureau of Labor Statistics

Falling union membership has been traveling companions with labor’s declining power, as represented by labor’s share of GDP.

Chart 2 seems to reflect two causal factors. The first is capital’s increase in the share of GDP at the expense of labor. Technology has been the game changer in improving, enhancing, and automating what used to be labor intensive production. The second is globalization. Specifically, China’s entry into the World Trade Organization allowed multinational corporations to engage in global wage arbitrage. That is, companies shifted labor intensive production to China, where its massive population earned significantly less than domestic workers. China’s re-engagement with the rest of the world oversupplied the global labor market with low- cost, skilled workers, which served to drive down the global price of labor.

Graph showing the decrease in the share of labor in gross domestic product (GDP)

Chart 2. Source: Federal Reserve, St. Louis

The average U.S. worker was expensive relatively speaking, and thus lost to both capital and overseas labor. This phenomenon lasted for quite some time, such that real household income stagnated for the better part of 15 years (Chart 3).

Graph showing a 15-year stagnation in real median household income

Chart 3. Source: Federal Reserve, St. Louis

Real wages bottomed shortly after 2010; it was not until about 2017 that real wages returned to the prior peak of 2000. Recovering real wages coincided with the peaking of China’s working age population. At the same time that the global supply of labor was declining, the United States experienced a deceleration in the growth of its working age population and had been since the early 2000s. In the last reported data, the working age population did not grow at all, but rather fell (Chart 4).

Graph showing a decrease in the growth of working age population

Chart4. Source: Federal Reserve, St. Louis

The dearth of workers has become a global phenomenon. With less supply comes a greater ability of workers to choose how they wished to be employed. Job openings now outnumber the unemployed. Quit rates have skyrocketed as workers are choosing higher pay and better working conditions (Chart 5). Employers are finding themselves in a competitive battle for workers and have been forced to increase wages, offer signing bonuses, and enhance other compensation benefits, such as college tuition reimbursements.

Graph showing an increase in employee quit rate

Chart 5. Source: Federal Reserve, St. Louis

Despite these wage gains, inflation has eroded the purchasing power of the average consumer. Essentials such as food, shelter, transportation, and utilities are up
significantly. Increasingly, consumers are feeling pressured, as reflected in the University of Michigan Sentiment Index (Chart 6).

Graph showing a pessimistic consumer sentiment

Chart 6. Source: Federal Reserve, St. Louis

Short of a recession, inflationary pressures do not seem to be easing any time soon. Commodities, after years of underinvestment, may be priced structurally higher in the near term. The combination of increasing home ownership among the Millennials and lack of housing units may mean higher rents and house prices. The stress on the average consumer could incentivize them to organize, quit, and otherwise negotiate for higher wages, more benefits, and better working conditions. How companies respond and mitigate higher labor costs will be a critical factor in maintaining profit margins and thus their stock prices.

Industries that are heavily labor intensive, e.g., retail, hospitality, etc., may be at higher risk of unionization efforts. Technology companies, for the most part, offer high pay and should be less susceptible to worker organization, although Microsoft recently announced across the board pay raises. In addition, some tech firms have areas that require significant labor, such as Amazon’s warehouses, and those remain susceptible to increased union activity. It will be essential to identify companies with strong pricing power such that profit margins remain strong even in the face of rising labor costs.

Rosa Y. C. Chen

As director of research and a member of the firm’s investment committee, Rosa’s primary responsibility is overseeing a team of analysts who enhance the investment performance of the firm’s portfolios by conducting research and analysis on individual stocks, industries, and macroeconomic topics. She is also a portfolio manager.

Rosa has worked in research and portfolio management for investment firms for over 20 years. Most recently, she was the co-head of equities at New England Asset Management. Previously, she worked for Mesirow Financial Investment Management as a portfolio manager and Deloitte as an investment consultant. Rosa has achieved the designations of Chartered Financial Analyst® and Certified Public Accountant.


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