January 20, 2022
👋 Hello, and welcome to a new year of Axios Capital. I'm Neil Irwin, captaining this ship for a few months while Felix Salmon is away on a book project.
- What to expect: More macroeconomics and central bank stuff. Fewer architecture photos and colorful shirts. Same laser-focus on helping you make sense of the constantly-colliding forces of global capitalism. Also, some wine content. 🍷
- I view the modern economy as a fascinating puzzle, and have spent my career trying to put together the pieces. Let's have some fun doing that together. 🧩
This week's newsletter is 1,625 words, a 6-minute read.
1 big thing: The end of worker abundance
Workers are in the driver's seat in the labor market, and that doesn't look likely to change anytime soon. It's also starting to alter the competitive landscape across the business world.
- The terms of competition are shifting, especially in labor-intensive industries. The advantage goes to companies that have some distinct advantage in their ability to attract the best workers.
Why it matters: It's not enough to have a great product. Companies need to find a way to attract the employees they need to fulfill demand — and in the super-tight labor market of 2022, that requires a new level of creativity and flexibility.
- In effect, for much of the last few decades, employers could hang out a "Help Wanted" sign, whether literal or virtual, and count on people lining up looking for a job. That has been turned on its head.
The big picture: In some companies' financial results in recent months, labor shortages have acted as a brake on earnings. Others in the same industry, not so much.
Consider FedEx and UPS. In the fiscal quarter ended in November, FedEx, which relies on armies of independent contractors, reported that labor shortages cost it $470 million.
- UPS, with a unionized workforce and higher pay, has reaped an advantage from loyal, long-term employees on its payroll.
- Its on-time delivery rates were higher than FedEx's in the run-up to Christmas (97.1% vs. 91.2%, according to ShipMatrix). Its stock price is up 31% over the last year, versus 1.5% for FedEx.
In retail, even amid widespread labor shortages, Walmart hired 150,000 employees this past holiday season. The company says its average hourly wage for store employees has risen to $16.40, more than double the federal minimum wage, and that 400,000 employees have taken advantage of company-paid training programs in the last year alone.
What they're saying: For companies that develop their own pipelines of talent by being willing to invest in worker training and other creative strategies, "it's a big source of competitive advantage," says Byron Auguste, CEO of [email protected], a nonprofit focused on employment.
- "I think companies are realizing that now, and the question is how they get there, from where they are," he says.
Companies need to give workers a reason to want to work for them beyond a paycheck. Here's what Chris Floyd, a recruiter for the restaurant industry in the Washington, D.C., area, tells Axios:
- Bigger companies are definitely at an advantage because they have the budget capacity to absorb higher salaries and wages.
- But restaurants are competing for workers on grounds other than salary. Floyd recommends those smaller-revenue restaurants compete by offering workers better quality of life, such as by closing two days a week and guaranteeing employees a break from the grind.
- "If you treat people with respect and compassion and see them as whole people, they feel that and tend to be more loyal even if they could be making more elsewhere," Floyd says. "Some employees did stick with their employers throughout the pandemic because they believed the employers had their backs."
The bottom line: The demographic trends suggest this shift in power dynamics between workers and employers will not be a short-term phenomenon.
2. Hard math of the labor shortage
Yes, the pandemic has created unusual temporary labor market dynamics. But in the bigger picture, the 2010s were a golden age for companies seeking cheap labor. The 2020s are not.
- In the 2010s, the massive millennial generation was entering the workforce, the massive baby bo0m generation was still hard at work, and there was a multi-year hangover from the deep recession caused by the global financial crisis.
But now, boomers are retiring, millennials are approaching middle age, and the Gen Z that follows them is comparatively small.
Why it matters: Demography is destiny, and U.S. demographics in the years ahead favor workers over employers.
By the numbers: The Congressional Budget Office forecast in July that the size of the U.S. labor force will grow by a mere 0.2% a year from 2024 to 2031. Employers can't count on a flood of new workers to fill empty jobs.
- "We're trying to warn employers that this is not just a passing fad but a new reality," said Bruce Evans with Emsi Burning Glass, a firm that analyzes job listings.
- "When I entered the labor market, all these systems were set up to keep people away, because every job was overwhelmed with the number of workers looking to do those jobs," said Evans. "Now that's just not true anymore, but all those systems have been retained."
The bottom line: Fortune favors the bold — as well as the companies that recognize that the labor market of the 2020s isn’t going to be like that of the 2010s.
3. Empty shelf psychology
A recurring thread of press coverage suggests that American grocery stores are starting to have so many empty shelves that they resemble the despondent Soviet-era world of scarce food.
- But it's not so simple. Overall, product availability is consistent with its levels over the entirety of the pandemic — though there are reasons people may be feeling shortage more acutely.
Why it matters: People want to buy the groceries and other goods they need, when they want them. In the pandemic world, that isn't always happening — which fuels a sense that the economy is broken.
By the numbers: According to the IRI Supply Index, 86% of grocery products were available last week, as were 90% of other consumer packaged goods.
- If you went to an average store, nine of the 10 things you wanted to buy were there. On average, at least.
The Biden administration is following these numbers closely. Brian Deese, the president's National Economic Council director, tweeted the IRI numbers Wednesday as evidence that the empty shelves narrative is overblown.
Yes, but: The 89% rate of overall product availability last week was consistent with levels throughout the last two years of pandemic, it's still below the 93% to 95% levels that retailers aimed for before the pandemic.
Moreover, variance in product availability across different products and in different locations has increased, said Krishnakumar Davey, president for client engagement at the research firm. So for certain products in certain markets, shortages really are severe.
- Across all markets, only 49% of products in the baking needs category were available in early January, and that was only 34% in the localities with the lowest numbers. Cream cheese, sports drinks and salty snacks were also in comparatively short supply.
The bottom line: Grocery availability isn't getting worse overall in recent weeks, but it has remained stubbornly below pre-pandemic levels — and it's no wonder that is making shoppers cranky.
4. Why 401(k) rollovers are so annoying
If you happened to change jobs recently, you may have tried to transfer your retirement account from your former employer into an Individual Retirement Account or your new employer's 401(k) plan. If so, you probably encountered a bureaucratic gantlet — and you're not alone.
- This is definitely an item drawn from your newsletter author's personal experience changing jobs in the last few weeks.
Why it matters: Kludgy processes around retirement account transfers result in people losing track of their funds, giving up important tax advantages, or otherwise disadvantaging themselves and being less prepared for retirement.
The exact problems that people encounter vary depending on the firms involved in a transfer and some luck. But they can include:
- Needing to make phone calls or fax documents to even start a transfer.
- A sluggish process where the old brokerage sends a new brokerage a check in the physical mail, creating delays and risking the check gets lost.
- More elaborate processes involving faxes and notaries and other nonsense for people just trying to hold on to their own hard-earned savings.
People therefore face a tradeoff of either dealing with these hassles every time they change jobs, or ending up with multiple small accounts at different asset managers come retirement time.
Why is it this way? There is nothing preventing asset management firms from creating more seamless rollover processes among themselves, Gaurav Sharma, CEO of Capitalize, a firm seeking to fix these problems, told Axios.
- But in practice, money management firms have little incentive to put much effort into making it easier to transfer money to another firm.
- "It's not to say that they're deliberately trying to keep your money in their firm, but if you have a technology budget that has to be allocated, the first thing to focus on is not 'how do I make it easy to take money out of my institution.'"
5. "Sideways" may have made pinot noir worse
Remember "Sideways," one of the best movies of the early 2000s? The story followed two middle-aged friends through a drunken tour of Santa Barbara wine country — and also had lasting affects on the California wine industry.
- The 2004 movie affected demand for different wine varietals. Paul Giamatti's character was insistent that "I am not drinking any f--king merlot." In the years that followed, demand for California merlot softened while demand for the character's beloved pinot noir soared.
But what about supply? How did winemakers adjust their production to the shock created by an Oscar-winning movie? New research published in the Journal of Wine Economics offers a surprising answer.
The big picture: Eight co-authors from the University of California-Davis, relying on agricultural data, found that the real change post-"Sideways" was that vineyards produced more pinot noir grapes in valley areas of California that are ill-suited to growing pinot noir.
- They posit that large winemakers wound up growing not-so-good pinot noir grapes in inhospitable land, then blended the wine produced from those grapes with the good stuff from coastal areas, thus stretching their supplies further to accommodate higher demand.
Side note: Actually, merlot is good.
The bottom line: A pop culture phenomenon that made California pinot noir more popular may have paradoxically made it worse.
And that's a wrap. I'm excited to share this space with you for the next few months. Tell me what you're thinking about.