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The Decisive Episode 19: Labor's Long Road

Kristen Hallam [00:00:03]:
You're listening to the Decisive Podcast, Insights and Analysis to Empower Confident Decision Making.

Susan Minio [00:00:16]:
Hello. I'm Susan Minio, head of strategic engagement. Labor, wages, and employment numbers are top of mind for many of us. Despite some areas of stability, the overall outlook is a cautious one. Today, on the decisive, we have Emily Crowley, a global labor economist and the head of our pricing and purchasing team. She'll discuss what all of these numbers really mean for your organization.

Emily Crowley [00:00:43]:
While we're starting to see a rapid correction in some of our commodity prices, given the weakness that we're seeing out of China, labor is a much slower boat. And while we're seeing improvements, it's going to take a long time to get back to what we would have previously considered kind of normal as far as wage escalation, and that's particularly true in regions like Europe, North America, kind of the western developed economies. Comparing our labor forecast to our previous forecast, really, the story is essentially unchanged. Labor market conditions are improving for employers. We're seeing wage growth start to slow. Really, this is a lagged response to high interest rates coming through to weaker demand. Unemployment rate is sticking higher, job vacancies are starting to fall because there's fewer kind of less optimism by employers and less about the economy and pace of future growth. Right? So there's less hiring that's going on.

Emily Crowley [00:01:41]:
One area I would highlight that is kind of bucking this trend is unemployment rates. Again, this is by kind of country looking at Q2 2019, 2022, 2023, 2024. 2019 is in there. It's kind of the reference benchmark of pre pandemic before we had this massive labor market disruption. Pretty much you can see for most of these economies, we're starting to see a little bit of a u shape. That unemployment rate in Q2 in 2024 slightly higher than where we were at the same time last year. The outliers, like I mentioned, in Latin America. So we've seen a stabilization in Mexico.

Emily Crowley [00:02:15]:
But if we look at Brazil, we continue to see tightness there. And, really, that's a function of Brazil in particular, Chile, where countries that really began cutting interest rates. They were on the leading edge of this as opposed to US, which now is on the trailing edge. Another big thing is this switch in sentiment. Right? But we have seen less business confidence in growth for 2025. We are starting to see things start to slow, especially in those developed economies, so that is resulting in slower higher intentions. We're seeing employers are exercising caution. We haven't seen mass layoffs.

Emily Crowley [00:02:47]:
There have been some industries in some sector thinking about, you know, the tech industry in particular where we have seen kind of an uptick in layoffs or job reductions. But as we continue to move forward and start to see unemployment rates moving higher and and that's this kind of feeling that if I let people go now, I'm not gonna be able to find a replacement that's been leading to this kind of a job retention, job hoarding. We might see some further relaxation and a little bit more churn entering those labor markets. So, again, you know, not great news for employees, but from an employer standpoint, those hiring conditions should be getting a little bit better. If we look at our long term wage trend, this is something that I wanna highlight, is that if you look compared to 2019, when we look at what real wages are going to be doing, so that's wage growth minus inflation, those profiles are slightly higher, and, again, it's going to be reflecting this issue that even though right now we have this softer demand picture, the worst of the labor crunch is over, there are still some policy issues, structural issues that are going to underpin and keep that wage growth profile a little bit stronger. But for now, at least in the near term, because we've entered the softer demand environment, the worst of the labor crunch is over. So job vacancies essentially is we have all of these job postings out published. We're trying to recruit people, but this is the percent of job total jobs that are going unfilled each month or in this case, each quarter.

Emily Crowley [00:04:17]:
These statistics are not widely available, unfortunately, for every country, but I've tried to pull we've got EU 27, UK, US, Canada, Japan, and Taiwan so we can at least get a little bit of the regional flavor in what's going on. This is really job vacancies has been a number one thing that we've been tracking as far as how tight our labor markets because the wage increases are really a function of better employee bargaining power, and this is a power that employees didn't have for really since the great recession, and they have been leveraging that power through stronger and higher wage negotiations. So not having positions filled, especially if you're in an industry like construction manufacturing, means that orders aren't get getting filled means that that's direct dollars that aren't coming in. So that typically tends to be more painful than some of the wage increases. Now what do wage increases mean from an inflation standpoint? I mean, it does mean that we're looking at a higher floor of cost. But one of the things that we've seen really kind of materialize over the first half of 2024 and we expect to continue is this rapid deceleration in this openings rate, and we're actually sitting at or, in some cases, slightly below where we were pre pandemic. So, again, this is more a metric of labor demand. The demand curve has shift inward, so we're not seeing the same kind of push by employers to hire.

Emily Crowley [00:05:38]:
The urgency is not there. That said, and I've said this before, that does not mean that labor issues are solved. Right? This is a temporary kind of transition that we're in right now that's linked to high interest rates. High interest rates are not going to be around forever, and we've already started to see that policy reversal. So in the future, not for 2025, not for 2026, but thinking 3 or 4 years down the road, we'll start to see demand pick up and some of this hiring pick back up. And because we have been in this area of structural shortages, that means that the situation where we have had labor shortages, we might revert back to that actually fairly quickly. But if you look at them in context of where we were in 2019, most regions are well below where we were in 2019, meaning that there is still a fair amount of tightness in labor markets that once we start to have demand pick back up will result in, again, that labor crunch, that shift in bargaining power to employees, and that slightly higher acceleration in wages. The other thing I'd say on the demand side is that, you know, the declines that we've seen have not been consistent across countries or across industries.

Emily Crowley [00:06:49]:
I've pulled out a couple sectors to take a kind of closer look at, but in generally, high interest rates tend to have a pretty big impact on anything that you're doing through borrowing money. So we've seen construction hit in particularly hard. One thing that stands out here really is how poorly Germany has been doing compared to its peers. So this is looking at the declines in vacancies we've seen since 2024. So we've seen that pretty quick decline in those vacancy rates there. Another thing to look at is in the United States where we haven't necessarily seen that sharp reversal in those job vacancy rates. In the United States, why that's the case? What makes us so special? Really, again, it comes to all of the policy measures that were put in place, fiscal stimulus, inflation reduction act, infrastructure and jobs act, chips and science acts. Right? All of those were massive spending policies linked to construction.

Emily Crowley [00:07:44]:
Where we've seen kind of the biggest snap in job vacancies, so bigger numbers, bigger bars means we've seen vacancy rates go from very, very high to very, very low. So there's been a very quick correction in demand is really an information communication. So those industries in general are performing extremely poorly. Manufacturing is kind of moving with its trend, but we have seen kind of a sharper reversal over the past 12 months in the United States and Canada and even to a certain extent Taiwan. And then, again, looking at the professional business and technical activity sector, that tends to be moving in line, but we have seen bigger pullbacks in Poland. What we're starting to see as we move into 2024 and 2025 and when we think about wage growth and we look at some of the escalation rates that have been coming in is how high this wage escalation has been compared to previous periods. But like I mentioned, labor markets are lagged, So this is really the lagged impact of inflation coming through and employees using their, you know, better bargaining positions to recoup some of those wage losses. Germany sticks out as one of the countries where employees saw a lot of deterioration in the purchasing power of their wages, and that's one of the reasons when we look in at the news, right, we're starting to see more kind of push in Germany by unions to recoup those real wages.

Emily Crowley [00:09:06]:
France, not hit as hard. United Kingdom, again, not hit as hard. UK had some really strong minimum wage growth that helped push protect employees. Poland, similarly, pursued a policy of very strong minimum wage growth, which actually kept real wages at least flat, and now we're looking at stronger real wage gains. Turning our our kind of view to North America and Latin America, again, we got real wage losses in United States and Canada. Mexico has maintained very strong real wage gains, and, again, this is linked to a policy of minimum wage increases I'll talk about in a moment, and Brazil, again, had very strong real wage losses in 2021, but starting to recoup those losses already. In Asia, one thing I wanna highlight here is that China is an outlier when we look at kind of the inflationary spiral that the rest of the world experienced. China has actually seen relatively modest inflation, so this is a country that has continued to experience some very strong real wage gains.

Emily Crowley [00:10:05]:
But when we look at this in the history, you would see that, you know, even wage growth in the 6 to 7% is much weaker compared to where we were kind of leading up to 2020, so that is a shift. So what will keep wages higher for longer? One thing I've already mentioned is that many governments are lifting minimum wages. The European Union in 2022 set a directive, and this is guidelines. There's no enforcement mechanism, but we have seen more countries start to announce minimum wage increases to be compliant with this guidance. And the goal or the target suggested target would be that wages should be either 60% of the median wage or 50% of the average wage. And one I would highlight here is Germany, which we're seeing that proportion of average monthly earnings, the minimum wage proportion of average monthly earnings is sitting below that 50% threshold. The labor minister in Germany did announce that he thinks that Germany should target a €15 minimum wage. Right now, it's it's sitting around €12.

Emily Crowley [00:11:02]:
So that would be a very significant increase and would have knock on effects for other areas of the economy. Again, that has not been passed, but it was just a piece of evidence there. Another area to highlight is Mexico. So Mexico under the administration on Andres Manuel Lopez Obrador, he's part of the Miranda party. He is leaving office. President-elect Claudia Sheinbaum will be taking office in October. She has announced commitments to continue minimum wage increases. Under AMLO, the minimum wage increase in Mexico nearly tripled over his 6 year term.

Emily Crowley [00:11:40]:
Claudia Sheinbaum has said that she would like to restore the purchasing power of the minimum wage. If we take her at her word, which I don't think we should not, that would imply another 50% increase over the minimum wage over 6 years. So not as kind of drastic as what we have been seeing, but still more support, and we've actually incorporated that into our our q three forecast. And then finally, the Kishida administration in Japan. Japan notoriously has been struggling with low wage growth, low inflation. The Kishida administration is really pushing to increase consumer spending, and one of the policies that they're doing that is through increased minimum wages. We still have structural issues as well. So this goes back to my conversation about right now, we have this temporary period of demand weakness.

Emily Crowley [00:12:29]:
Once we start getting back into a demand growth cycle as far as labor and hiring, we have not necessarily fixed some of the underlying structural issues. Right? One of the big ones that we're facing, especially in North America and in Europe, is the aging skilled workforce and just also an aging workforce. And there are also so there's demographic challenges, there's skills challenges, and one of the things I highlight, this is looking at the US at a distribution of age across some of the occupations, is typically we like to see a nice bell curve. So if we look at the 2,000 numbers, we get kind of peaks in the 35 to 45 and trailing off on either ends. When we start looking at, you know, things like assemblers and fabricators, metal worker and plastic machine workers, printing workers, some of these lower skilled occupations that, you know, we've been able to get by for 10, 15 years, essentially maintaining the same labor force, we've seen this massive shift of workers' ages skewing towards, you know, 60 plus. So when 10, 20, 25 percent of your workforce is retiring or is is going to be approaching retirement age in the next 5 to 10 years, we have a massive problem. It's not a problem now, but it's absolutely gonna be a problem, you know, in the future. So how do we do this? We think about how do we bring more people into the workforce? How do we develop our skilled talent pipeline?

Emily Crowley [00:13:57]:
Additionally, we have these new industrial policies that are creating demand for new labor force. We're seeing this in the green energy transition, whether that is manufacturing of green materials, installation of solar panels, building out, and then also staffing battery plants, all of these sorts of things. Right? This is a labor force that doesn't exactly exist right now. So we're starting to see we still have these pockets of demand first. Also, AI technology, this has its ups and its low, but, again, it's a new technology. It's a disruptor. You're gonna be needing people to staff these AI technology firms, be skilled in the correct usage of AI technology. Again, so a little bit more of disruption that can create some friction in labor markets as well.

Emily Crowley [00:14:36]:
And then also there are things that we've seen renewed demand in sectors or regions where activity has been weak. So, you know, we haven't really been talking much about Alberta oil sands. That was a really big topic 10 years ago. It's been pretty flat, but now we're starting to see more project development, and that is a labor force again that doesn't have a large nascent labor force. You have to fly in people. You have to attract labor, so that has a potential of being very disruptive. So we've talked about the skill shortages. Also, we have immigration as a potential release valve.

Emily Crowley [00:15:06]:
It's not without its political challenges. We're seeing the EU start to fast track more workers, especially targeting skilled workers. Canada is fast tracking immigration and, similarly, even in Asia and countries like South Korea and Japan, we've seen a broadening of the visas available or the industries that can apply for temporary worker visas to help fill some of those shortages. So that's a Band Aid. It's not not a fix, but, you know, we are starting to see things move in that direction. And then finally, workers still retain some bargaining leverage. They can see rates in some industries are still high. Unemployment rates, as I mentioned, are still low by historical standpoint.

Emily Crowley [00:15:43]:
So labor markets are tight. Even though they're becoming less tight, that doesn't mean that it's hiring is necessarily easy. And the other thing that we've seen in the news is that labor unions have built a track record of success. So when you start seeing major union wins, major union gains, that gives more leverage for other unions that are approaching bargaining to kind of flex their muscles as well and to pursue some of those increases. I mean, you can really see, you know, again, their stickiness in unions and union wage agreements just by their nature. Looking at the United States, you can kinda see the lagged effects compared to union, nonunion wages. The bottom line, labor markets are improving, but we're still far from normal.

Kristen Hallam [00:16:24]: Thank you for listening to the Decisive podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and stay informed.