Labor Issues & Investment Decisions

Q: This has been a crazy year for labor. There’s constant news about labor shortages, the Great Resignation, and something called “quiet quitting.” Should investors be paying attention to any of this?

The current labor situation is certainly unprecedented in terms of having so many “Help Wanted” signs that just go unfilled, especially in industries like education, service, and healthcare. In fact, these industries are below replacement rates: they have more job openings than potential workers, according to the U.S. Chamber of Commerce. That is obviously going to have serious implications for firms working within those areas.

On the labor supply side, a lot of people just stopped working or reduced hours, especially during the height of the pandemic. Generous support from the U.S. government – which spent over a quarter (27.09%) of GDP to deal with the crisis – gave them an increased ability to make those kinds of decisions.

And we can’t discount COVID’s ongoing impact on labor supply; there are indications that the ongoing transmission and the resulting increase in “long covid” is suppressing labor supply. “This is really a massive issue for workers,” researcher Lisa McCorkell told CBS News earlier this year. “What we saw in our patient-led research collaborative study is that about two-thirds of survey respondents had to reduce hours or stop working completely.”

However, it’s worth noting that the claim that “no one wants to work” is overstated. What many have called the Great Resignation, the World Economic Forum calls the “Great Reshuffle.” With unemployment still under 4%, workers are still working. They’ve just changed where they’re working, but that’s always changing.

On the demand side, we’ve seen a lot of cyclical businesses go from huge contractions – during which many companies laid off or furloughed workers – to huge accelerations as consumers started normalizing their behavior again. In fact, things rebounded a lot faster than most people expected, so demand for labor has accelerated faster than the already depressed labor supply has.

But I would caution against trying to draw any broad conclusions from all of this.

First, each vertical has its own story. Labor issues in healthcare, for example, don’t translate into other sectors. These people were essentially working at ground zero when COVID struck, in an industry that’s somewhat disconnected from economic cycles.

If you were working in healthcare, there was no option not to work; instead, it was to work a lot more. I can see how there's a finite lifecycle for that. Eventually people just burn out, but that’s a set of circumstances that’s specific to the healthcare field.

Second, I expect most (if not all) of the current labor-related abnormalities to resolve. While I can’t discount the possibility that we’re witnessing the emergence of a new normal, more likely current circumstances are a natural and predictable byproduct of the events of the past two years. If so, as those circumstances unwind, associated labor problems will ease. If the economy slows down, a lot of these “Help Wanted” signs will go away. Similarly, as safety nets enacted during COVID are eventually withdrawn, behavior will change commensurately. The demand side will also take care of itself because you're dealing with a lot of boom-and-bust cycles.

Ultimately, none of this is a major factor in individual investing decisions for me. I addressed the question of labor shortages specifically last year. Back then, I wrote, “[T]his just isn’t a question I really look at intensively myself.”

By and large, I still hold to that view. I tend to view labor issues as a broader economic variable or market condition. While I do pay attention to individual companies’ ability to recruit and retain staff, larger labor questions are extrinsic to individual businesses. So, they inform but don’t directly drive my investing decisions. Yes, I want to know if an individual business is losing people faster than it’s replacing them, but I’m more concerned if that’s a people strategy problem than if it’s a labor shortage problem. The latter is a market condition that will likely fix itself sooner or later. The former is a red flag about the business itself.