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The American worker is getting lazier.
Or at least, that’s what a quick look at recent productivity numbers might make you think.
Q1 productivity dropped for American workers while wages actually increased – workers are getting paid more to get less done. Is it laziness though? As tempting as the assertion might be, there’s a lot more to explain recent decreases in productivity.
Yes, there’s an incredibly tight labor environment. With unemployment near all time lows and multiple job openings for every person looking for work it definitely seems like workers have all the leverage. They can take it easy on the job and know they won’t get fired, and even if they do, who cares? There’s a position open for them across the street. This comfort factor is definitely part of the productivity narrative, but it’s not the only driver. There’s more to the story if we really want to understand the productivity and wage situation in the United States.
Like It Or Not, Covid Is Still Here
Perhaps the most obvious driver of variance in productivity is Covid-19. While hospital counts have remained low and acute cases are less of a concern than they have been in the past, the new Omicron based strains are more infectious and spread faster. And more people being sick is impacting productivity.
Illness has always put a dent in productivity numbers – even before Covid there were robust studies done around the cost of the common cold. Flu vaccines have been seen as a booster of economic productivity for years with the broad savings measuring in the billions of dollars. Covid is no different. Its combination of potential severity in the form of Long Covid cases and the risk it poses to the elderly, combined with broad infectiousness, is a real economic drag.
Even if we view it as “it’s just another cold” and normalize it, then we should still expect broad productivity to drop. After all, Covid hasn’t’ supplanted the Flu or the common cold – it’s just another potential illness that’s been added to the annual roster. A new annual cold or flu strain in addition to the standard pre-Covid rotation suggests we should start expecting employees to be out of the labor force a few more days a year – for someone working 250 days a year, an extra three days of illness is a more than 1% drag on their output.
Churn In Remote Employment
Another huge driver of variance in productivity numbers is employment churn. By now I’m sure we’ve all heard of the Great Resignation and have seen the work force start to reshuffle. With so many open jobs and new flexibility around remote work, a lot of people are moving and finding new opportunities. Remote work and smoothing pay across more geographies has a lot of positive externalities over time, but in the short term it’s difficult. New employees require training and training is difficult when you’re working remotely.
Training and finding a new job impacts productivity in a number of ways.
First, there’s the actual time spent training. Getting up to speed and becoming a pro at a new role doesn’t happen overnight, especially for jobs that are more complex. No matter how great an employee might become or how qualified someone is, there’s still a learning curve as people navigate new software, new hierarchies, new products, and new teammates.
Second, there’s the time that managers and leaders have to spend training new people. The people who are training new employees tend to be the most productive workers and while training time has long term benefits for the firm, over the short term it hampers output and productivity. Investments in the future have real time costs now.
Third, a lot of new employees are struggling to become part of a broader team while working remotely. The transition to remote work during Covid-19 was a shock and required a lot of recalibrating – but broadly speaking, teams stayed intact or remained stable. There were connections and understandings formed in the office that people could carry into remote work – a shared culture people could draw on. Bringing on new team members into an entirely remote environment is an entirely different experience and a lot of companies are still figuring out how to do it effectively. Low engagement, poor training, these are going to impact labor productivity for a while as firms across the country figure out how to add staff effectively.
Labor Market Slack
Given how difficult it is to train new hires, perhaps it’s unsurprising that unemployment has remained the highest for young workers. Fresh graduates without established networks, without experience through which they can demonstrate reliability in remote settings, they’re having a hard time finding jobs. Labor force participation rates for young people have dropped, and according to the US Department of Labor in April of 2022, the 20 – 24 year old cohort’s unemployment rate is more than double the unemployment rate of people of the same gender who are in the 35 – 44 cohort. This is unfortunate but also makes a lot of intuitive sense. Who wants to take on a new employee without any training when they can’t see them, can’t trust them, and they don’t have a track record?
The lack of trust is especially pertinent when we consider the strength of corporate America’s balance sheets. Companies are flush with cash and have plenty of ability to pursue talented labor. If an employer with a strong balance sheet has to choose between paying a bit more for a more certain asset, as opposed to taking a flyer on a new employee, it’s a bit of a no brainer – pay a bit more, get the premium asset, get back to productive growth.
What this leaves us with is a labor market where labor has more strength than it’s had in the past, but that’s harder to break into. The expectation then is that entry level jobs will be priced lower, but that young workers will expect rapid wage growth once they’ve proved their ability on the job.
Investing In Growing Productivity
Companies who don’t want to train new employees and who want to limit their hiring have an alternative to try to increase productivity – technology. Increasing wage pressures and the difficulty of recruiting talent means it’s more and more worthwhile for companies to spend money maximizing the talent they already have. It’s the classical factors for production – companies can spend on labor or on capital, and right now labor is getting expensive!
We expect the technology companies that enable automation and productivity growth to become increasing vital parts of the economy as wage costs remain elevated and long term demographics constrain labor supply. US population growth has slowed down and demographic pressures on the labor force are likely to persist in some shape or form over the long term baring substantial changes to immigration policy. If the demographic add to GDP starts to slow, then increasing productivity becomes essential for GDP to grow. Automation and technological innovation are at the heart of increasing productivity and production over the long term.
Companies who supply innovative technological solutions come in all shapes and sizes and exist across sectors. Some great examples are companies like Salesforce (CRM), who pioneered the software as a service model and has built out a platform that’s rapidly becoming a foundational corner of enterprise productivity. In industrial automation you could look at firms like Rockwell who help automate assembly lines and factories and stand to benefit from onshoring and manufacturing labor constraints. In the world of finance the examples are everywhere, from digital banking platforms like Goldman Sach’s Marcus to payment processing companies like Block (SQ) ) who use payment processing data to make it easier for small businesses to get loans.
In summary, every sector has specific challenges when it comes to increasing productivity, but all sectors are facing rising wage costs and difficulties with finding and retaining talent. Companies who can improve productivity and reduce labor constraints provide significant value and have long term demographic tailwinds. They could be a great investment and they deserve your attention.