The “Great Resignation”- 6 Supply Reasons That Labor Market Tightness Is Transitory

Labor cost is a key question, but 6 supply reasons we see as transitory
The focus of this note is primarily focused on the shortage of workers.  Earlier this week, my co-founder John Bai and I met with DJ, a portfolio manager in NYC, and her team.  DJ works for a large asset manager in NYC and is one of the earliest clients of Fundstrat (signing up in 2014, when we first launched).  So, we were glad to sit down with DJ.  On her team was her colleague from London, Marina, and Marina asked about our perspective on the “Great Resignation.” 

This is the term being applied to the millions of Americans who decided to “quit” (often rage quit) and this turnover is amplifying what is already a shortage in the US labor markets. 

• this high quit rate contributes to labor shortage, JOLTS (BLS jobs opening) shows record openings
• labor shortage is driving higher wages

• “inflationists” see this as structurally higher wages –> inflation risk
• we believe this “great resignation” effect is transitory –> effects will be transitory

Sources:

• https://news.harvard.edu/gazette/story/2021/10/harvard-economist-sheds-light-on-great-resignation/
• https://www.theatlantic.com/ideas/archive/2021/10/great-resignation-accelerating/620382/

Record job openings… 7.4 million openings > Feb 2020 of 7.2 million
The question of the whether this tightness in the labor market is transitory, as noted above, is key.  After all, labor costs impact the entire supply chain, and also many businesses operate on already thin margins. Thus, this higher labor cost, if structural, will result in a rise in inflation.  Now reflation, or a rise in the level of inflation, is different than an inflation problem.

• an inflation problem is an escalation and maybe continuous escalation of inflation conditions
• thus, the question of how long the labor market stays tight is important.

The most recent tabulation of job openings, or the JOLTS survey, shows there are 7.4 million job openings.  This is above the 7.2 million shown in Feb 2020.  

• on the surface, record openings means businesses are having difficulty hiring
• like we noted above, in “normal times” this would be a sign of a tight labor market
• which means wages need to move higher
• BUT the key question is whether this record ‘job openings’ jibes with the current state of the labor market

6 Supply reasons this labor market tightness is “transitory” –> Supply of Labor will rise in 2022 and beyond

The question of whether this labor market tightness is transitory or structural is important, for obvious reasons.  I know there is a general “impression” that the workforce feels empowered, or doesn’t want to return to the office.  Thus, this is simply the new conditions and thus, labor will be tight.  But this sort of defies logic.  

Ultimately, the labor market conditions will be a function of “supply” and “demand” of labor.  We have 6 reasons to expect the “supply” of labor to rise in 2022 and beyond.

6 reasons “supply rises:

1.  Number of “employed” Americans is 147.6 million, down 4.9 million from Feb 2020

2.  Participation rate is only 61.6% compared to 63.4% Feb 2020 and 67.3% in Feb 2000

• Implies +3.7mm additional workers to match Feb 2020
• Implies +11.7mm additional workers to match Feb 2000

3. Organic “growth” –> 4.2 million Americans turn age 18 every year

4. GenZ supply growth –> GenZ so large, they contribute to acceleration of labor force starting 2025

5. Legal immigration –> US still adds +1.1 million “legal permanent residents” (LPR) annually –> supply growth

• Ben Casselman, of Fivethirtyeight.com, shows majority of “Great Resignation” is labor with less than college education
• This labor shortage can be met with LPR supply growth

6. COVID-19 impact –> 4.7 million Americans not working due to COVID-19 or caring for someone with COVID-19

• this is a “supply” impact that will mitigate as COVID-19 becomes endemic

#1 EMPLOYED: Labor utilization is 4.9 million less now than Feb 2020
This is an obvious statement and self-evident:

• 152.5 million Americans employed in Feb 2020
• 147.6 million Americans employed now

Labor usage is actually 4.9 million lower now than pre-COVID-19.  Has the economy permanently changed during COVID-19 that somehow less people working means a tighter labor market? 

• Nope

#2 PARTICIPATION RATE:  Participation rate matching Feb 2020 means 3.7 million people looking for work
Look at the participation rate, fyi, we also show this by age. 

• Participation rate is 61.6% now vs 63.4% Feb 2020, down 1.8% points
• This is 3.7 million in additional labor supply
• Why should participation rate by 180bp lower permanently?

#3 NEW ORGANIC SUPPLY: 4.2 million Americans turn age 18 every year
The labor market would be tight if there was no “organic” growth of labor supply.  This is not true in the US.  The increase in # Americans turning age 18 in America is 4.2 million annually:

• we use age 18 as an arbitrary “add to labor supply” year
• this figure of 4.2 million is fairly consistent over past decade
• all things being equal, the US labor supply grows every year
• granted, there are retirements (see next section)

#4 GenZ ACCELERATING LABOR SUPPLY: Total labor force set to grow at a faster pace in 2025-2040 vs today
GenZ are folks born year 2001 to 2021, roughly.  (Is the next generation called GenAA?).  Our data science team plotted the growth of the workforce (age 16-64):

• 5 year increase in Americans age 16-64
• since 1990 to 2040
• this pace of supply growth slowed in the 2000s to today
• this is due to the small size of GenX, but is recovering due to Millennials

• but a real kicker is coming from GenZ
• their strongest impact will be felt in 2025
• I realize this feels like an eternity to folks

But this shows that the US labor force organically is set to grow nicely over the next decade.  If the labor market is growing at a faster pace, how can anyone really think labor inflation is sticky and structural?

#5 LEGAL IMMIGRATION: Legal immigration is adding 1.1 million to the labor force annually.
Despite the movement to limit immigration, there is still a healthy supply of labor force growth coming from New Legal Permanent Residents, or LPR.  Again, our data science team pulled this together (thanks John Bush) and shows the annual LPR increase by year, since 1820:

• this figure has been 1.1 million annually roughly over the past decade
• This works out to about 0.3% total US population increase due to immigration
• This was 0.5% in the mid-1990s

It may not be a popular idea, but increasing the number of LPR will increase the labor supply.  This increase mitigates pressure on wages, as this directly increases the workforce.

…Ben Casselman of Fivethirtyeight.com notes that “blue-collar” is driving the “Great Resignation”
The question is whether LPR additions to the workforce can mitigate the “Great Resignation.”  In short, I believe the answer is YES.

Ben Casselman has a useful thread walking through the data.  I included this snip as it is the most pertinent.  As he shows, the transition rate (quit rate between jobs):

• highest transition rates among “less than high school”
• way above pre-COVID  levels
• Bachelors and Graduate degree holders –> same to lower vs pre-COVID-19

So this data shows that this “Great Resignation” is among those more non-White Collar jobs.  Thus, LPRs could be one solution to address this shortage in workforce with “less than high school” education (see below).

#6 WORKERS HIT DIRECTLY BY COVID: Nearly 5 million of existing workforce now
Lastly, we have to be mindful of the direct impacts of COVID-19 itself.  We wrote about this last week, so this might sound familiar.  The Census Bureau Household Pulse Survey looks at how many workers are at home caring for someone with COVID:

• Someone at home caring for someone with COVID is someone not “working”
• This figure is nearly 5 million
• It has been surging due to the Delta variant
• This is nearly 10 months worth of jobs growth

• Is it any wonder that there are labor shortages?
• This does not seem permanent, to us, since COVID-19 case prevalence should drop in the future

Thus, COVID-19 itself is creating shortages in the labor market.  If one believes COVID-19 will be generating 100,000 cases per day into the indefinite future, then this ~5 million jobs shortage is permanent. 

• if COVID-19 recedes, this is merely a transitory shortage of labor
• we are in the transitory camp

STRATEGY:  Panic sellers…Investors raised a lot of cash in last 6 weeks and now uncomfortably underinvested
Last month, MIT researchers published a study looking at 600,000 brokerage accounts and trying to understand what type of person is a panic seller.  The conclusion of the study is:

• many investors liquidate their accounts to 100%
• the most common archetype
• males, age >45 married
• males, age >45 and consider themselves “excellent investment experience”

So panic selling, basically, is older Americans.

This level of panic selling was on ample display in the past 6 weeks.  We wrote previously about how we saw investors get progressively bearish over the past 4-6 weeks:

• the ICI money market fund flows show this clearly
• both retail and institutional cash balances spiked in late September
• investors were “panic selling”

…S&P 500 makes new highs = affirming “everything rally” into YE intact
The S&P 500 made a new closing high yesterday as shown below:

• 9/2/2021     –> 4,545.85
• 10/21/2021 –> 4,549.78

A new closing high is a positive.  This affirms the everything rally into YE is intact.  Yesterday’s reversal is positive considering the weak open.

Figure: Way forward ➜ What changes after COVID-19
Per FSInsight

Figure: FSInsight Portfolio Strategy Summary – Relative to S&P 500
** Performance is calculated since strategy introduction, 1/10/2019