More than 114 million people lost their jobs over 2020, according to the International Labor Organization. The worst-affected industries were accommodation and food services where global employment declined by over 20 per cent, followed by retail. These sectors were particularly hard hit by lockdowns, forced closures and plummeting tourism.
You could be forgiven, then, for thinking there’d be a mad scramble for jobs when global economies perked up and the high street reopened. But what we’re actually seeing is a labour shortage in some areas of the market, which is pushing up wages.
The lifting of lockdown has resulted in surging consumer spending, as re-opening excitement coincided with strong household balance sheets after a year of forced saving. Consumers have been particularly keen to splurge on leisure and experiences to make up for lost time and revive their stagnant social lives.
Businesses that have been essentially shut for the last year have struggled to accommodate the sudden rush of demand, especially as remaining Covid-19 measures like table service and extra cleaning increase labour intensity.
There are no fewer potential workers than there were before the pandemic, so this is a bit of a puzzle. To some degree it’s a transitory issue due to sudden reopening and the time and admin required to fill vacancies (known by economists as ‘frictional’ unemployment).
In the UK, Brexit has resulted in a much-decreased pool of migrant labour. It’s estimated that as many as 1.3 million overseas workers have left British shores since late 2019. Migrant workers were disproportionately concentrated in hospitality, so this is aggravating labour shortages. While some of the factors above may be temporary, this will be a permanent problem.
Economics 101 dictates that when demand exceeds supply, prices (i.e. wages) will rise. This should redress the balance by attracting inactive workers back into the labour force, and/or dampen demand as wage inflation is passed on in higher prices for meals and hotel stays.
Indeed, there’s evidence both in the UK and US that this is happening, particularly in the retail and hospitality sectors.
But wage inflation is not all bad news, especially for sustainable investors. For a start, the flip side of higher costs for businesses is more money in the pockets of workers. Low-paid workers typically have a high marginal propensity to spend, so most of the money will end up being pumped back into the economy. Businesses that cater to these workers will end up net-net better off.
Secondly, higher wages tend to make for happier workers, which can boost productivity and retention. This is why we’ve tended to favour companies that already pay above the minimum wage, as well as because they will see less cost pressure when the wage floor rises. Companies that have not valued their workers have the highest risk of losing their staff once they have other options. Since the start of the pandemic, we’ve written about our belief that a new social contract is emerging, particularly in relation to how employers treat their employees. Tightness in the labour market is causing this to play out even faster than we anticipated.
The balance of power has shifted to the worker for the first time in decades. Employees are using their newly-found bargaining position to demand more from their employers –they want decent wages, career progression and greater flexibility to come with their job.
We believe human capital is a powerful value creator and as sustainable investors, it’s important to us that the companies we invest in can show us that they are taking care of their people.
Katherine Davidson is Portfolio Manager, Schroder Global Sustainable Growth Fund
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