The Big Idea

Summer of labor unrest

| August 11, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

The press in recent weeks has been full of stories about labor unrest. Workers have threatened strikes and work stoppages in some high-profile industries. The militancy of labor suggests that labor costs will be an ongoing issue for a number of companies and industries.  If so, then the Fed may have to work hard to rein in inflation and keep it at or near the 2% target.

Labor gaining leverage

With the unemployment rate near a 50-year or greater low, workers clearly see their ability to drive a hard bargain. There are several elements to this.  First, cyclical tightness in labor markets, signaled by the unemployment rate and other indicators such as JOLTS job openings—still about 2 million above the pre-COVID all-time peak—is giving workers the upper hand in pushing for higher pay and other concessions. Second, hourly wages did not keep pace with inflation over the past few years, so workers are seeking to be made whole on a real basis.  Finally, demographics. The population is aging, with more Baby Boomers retiring and immigration evidently not completely filling the gap. The overall labor force participation rate is trending down.  This means that independent of where we are in the business cycle, future labor supply is likely to be tighter on average than before.

This combination of factors along with the acute labor shortages created by the pandemic have emboldened organized labor to seek hefty pay hikes.

Recent settlements

One of the first industries to have a strike threat was the airlines. Delta Airlines first negotiated a deal with its pilots’ union in March with a 34% pay rise.  American and United concluded negotiations in July. United Airlines offered a roughly 40% pay raise over the four years of the new contract, a deal that Delta and American had agreed to match.

Also in late July, the rank-and-file FedEx pilots rejected a deal negotiated by union leadership and the company. That offer included a 30% pay increase over five years and a 30% boost to pensions.  A strike is not imminent, as the negotiations will continue, overseen by the National Mediation Board.  In part, FedEx pilots were unhappy that their pay raises were less than the airlines offered to their pilots.

In June, the dockworkers at West Coast ports tentatively agreed to a 32% pay hike over six years as well as a one-time “hero bonus” of several thousand dollars each for working through the pandemic.

In late July, the Teamsters and UPS reached an agreement on a new contract, averting a strike threatened for August 1 that could have temporarily crippled the economy.  Drivers gained a pay hike of close to 20% over the length of the contract.  Eyebrows were raised by the announcement that UPS drivers will be making $170,000 per year in wages and benefits by the end of the contract.  In fact, online job searches for “UPS” jumped in the days after the agreement was made public.  Recently, UPS downgraded its earnings outlook, due in part to the added labor costs associated with the new contract.

Ongoing negotiations

The biggest ongoing labor situation is in the auto industry.  The UAW’s contract with the Big Three automakers expires September 14.  The union is demanding a 46% wage increase over four years as well as a restoration of pensions, cost-of-living increases, a 32-hour workweek, and higher retiree benefits.  The automakers have indicated that the UAW demands would increase hourly labor costs to over $150, up from $64 currently.  Both sides are pretty adamant, as the union feels that it is owed payback after supporting the companies through the Global Financial Crisis and Covid, while the Big Three are arguing that the union demands would render their operations uncompetitive relative to non-union automakers.  This negotiation is likely to get bumpy as September 14 approaches.

Los Angeles hotel workers have been striking for five weeks.  Their proposals are particularly interesting. They are asking for a 58% wage hike over three years to $30 per hour. Hotels have countered with “only” a 33% raise.  The union is also demanding that the hotels institute a 7% fee, or support an equivalent government tax, to build affordable housing that would be available to hotel workers as well as loans and other assistance for workers to pay for that housing. The union is also asking hotel owners to support a 2024 ballot measure in the city of Los Angeles that would require them to make empty rooms available to homeless people, a provision that hotels say would kill their business.

In addition, 11,000 Los Angeles city workers walked off the job last Tuesday for one day, demanding higher pay and better benefits, though their contract does not expire until December.

And, to complete the picture in Los Angeles, of course, the Hollywood writers’ and actors’ unions are also on strike, though their issues are different—more about intellectual property rights than hourly wages.

On Saturday, August 5, the Wall Street Journal profiled a perhaps surprising group to be attempting to organize and demand higher pay: food delivery workers in New York City. The city government passed a new law in June that requires app-based delivery workers to be paid 50 cents per minute they spend on an actual delivery or close to $18 an hour for the time they are active on each app. The app companies have sued, arguing that the resulting pay rates could put them out of business.

Economic implications

Taken individually, each of these instances are unlikely to impact the overall economy much, at least in the absence of a disruptive strike.  However, at a time when many are interpreting the June and July CPI figures as signaling a decisive turn lower in inflation, the doggedness of labor threatens the narrative.

There was much talk a year ago of the possibility of a wage-price spiral.  Wages rise due to a tight labor market, which forces firms to raise their prices, which, in turn, causes workers to charge into the boss’s office and ask for higher pay to match the rise in the cost of living, a cycle that can eventually spin out of control.  That discussion died down when average hourly earnings came off their highs in the second half of 2022.

Don’t look now, but average hourly earnings were a tad firmer in June and July, and this raft of impressive, negotiated pay hikes in recent months suggests that labor costs could yet help to drive inflation higher. The key is whether the fat raises gained by airline pilots, UPS drivers and others represent anomalies or a phenomenon likely to be repeated across a number of industries and job types.  As I have often said, as long as the unemployment rate remains at or near a 50+-year low, there is little reason to expect wage pressures to recede.

The flip side is that while formal gauges of long-term inflation expectations, in surveys or the TIPS market, suggest that most people look for inflation to return to the 2% range, the demands of some workers suggest otherwise.  If workers across the economy are demanding to be made whole for the loss of purchasing power seen over the past few years, then the wage-price spiral dynamic is at risk of kicking in, which could mean that high inflation may catch a second wind.  Unless companies fully absorb sharply higher labor costs, the deals negotiated this summer will necessarily lead to higher prices. It is doubtful that airlines, UPS, and presumably the Big Three automakers will simply eat the billions in higher labor costs that they have signed off on without at least attempting to pay for them by raising their prices.

Stephen Stanley
1 (203) 428-2556

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