The balance of power has shifted to the worker – Katherine Davidson
More than 114 million people lost their jobs in 2020, according to the International Labor Organization. The sectors hardest hit were accommodation and food services, where global employment fell by more than 20 percent, followed by retail trade. These sectors have been particularly affected by lockdowns, forced closures and the fall in tourism.
You could then be forgiven for thinking that there would be a mad race for jobs when the world economies recovered and Main Street reopened. But what we are actually seeing is a labor shortage in certain areas of the market, which is driving wages up.
The lifting of the lockdown led to an increase in consumer spending, as the enthusiasm for the reopening coincided with the strength of household balance sheets after a year of forced savings. Consumers have been especially keen to splurge on hobbies and experiences to make up for lost time and revive their stagnant social lives.
Businesses that have been essentially shut down over the past year have struggled to cope with the sudden surge in demand, especially as remaining Covid-19 measures like table service and additional cleaning increase in demand. labor intensity.
There are no fewer potential workers than before the pandemic, so it’s a bit of a headache. To some extent, this is a transitional problem due to a sudden reopening and the time and administration required to fill vacancies (known to economists as “frictional” unemployment).
In the United Kingdom, Brexit has caused the pool of migrant labor to shrink considerably. It is estimated that up to 1.3 million foreign workers have left UK shores since the end of 2019. Migrant workers were disproportionately concentrated in the hospitality industry, exacerbating labor shortages. While some of the above factors may be temporary, it will be an ongoing issue.
Economics 101 dictates that when demand exceeds supply, prices (i.e. wages) will rise. This should restore the balance by re-drawing inactive workers into the labor market and / or dampening demand, as wage inflation spills over into higher prices for meals and hotel stays.
Indeed, there is evidence in both the UK and US that this is happening, especially in the retail and hospitality industries.
But wage inflation isn’t all bad news, especially for sustainable investors. For starters, the flip side of higher costs for business is more money in the pockets of workers. Low-paid workers generally have a high marginal propensity to spend, so most of the money will eventually flow back into the economy. Companies that cater to these workers will be better off.
Second, higher wages tend to make workers happier, which can boost productivity and retention. This is why we have tended to favor companies that already pay above the minimum wage, as well as because they will see less cost pressure when the wage floor increases. Companies that have not valued their workers are at the greatest risk of losing their staff once they have other options. Since the start of the pandemic, we have written about our belief that a new social contract is emerging, especially when it comes to how employers treat their employees. The tightness of the labor market makes this happen even faster than expected.
The balance of power has shifted towards the worker for the first time in decades. Employees are using their new bargaining position to demand more from their employers – they want decent wages, career advancement and more flexibility to go with their jobs.
We believe that human capital is a powerful creator of value and that as sustainable investors it is important to us that the companies in which we invest can show us that they take care of their people.
Katherine Davidson is Portfolio Manager, Schroder Global Sustainable Growth Fund
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