Western Repricing of Labor
Change Looms on the Horizon
Part of my thesis on the K-shaped recovery is about a repricing of Labor in the west. I did touch on this for a bit in my appearance on the AGTM podcast, episode 60. But I want to spend some more time to expand on what this will look like in the west. One consequence that has materialized has been significant increases in food, transport, and energy prices as we exported much of the production of those resources out of the west and to the East, and then cut ourselves off from that market, as I covered in the Parallel Economies post. Most of these problems could be avoided in the US, Australia, Canada and other resource rich western nations if they adopted a war-time economy which incentivized production, but that isn’t being done right now. Europe, and Japan however simply can’t avoid this fate.
The other form of production that is currently not being incentivized in the west is productive hard labor. I speak often about the degreed laptop class, this is a relic of an era in the west that just ended. Most people are not aware that this era has ended yet in the west, but I’m going to discuss just what has ended and what the future looks like.
I took a broad poll on Instagram and user responses are included in this post. All 57 relevant responses are in Section 6 if you want to view the raw messages.
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Please feel free to skip around or ignore certain sections if it does not apply to you. The Table of Contents is made to preserve your time in this manner. You can always simply read the conclusion if you are in a hurry.
Table of Contents
An Unfortunate Example
The Entry Level Problem
The Gaping Hole
Automation and Manufacturing Renaissance
Conclusion
Instagram Responses
1. An Unfortunate Example
If you are plugged into the memetic sphere of the internet, you have probably already seen the Tik-Tok below. It follows a 22 year old fresh college grad who works for LinkedIn. She’s describing a work day, and admittedly, this is probably an ideal work day that cuts out some of the productive time and just shows the best parts of the day. After all, that’s how most people use social media, as a status signal.
I will avoid dunking on her except in this one way. It is peak Gen-Z for her to be on page 7 of a Yuval Noah Harari book. As the internet and lowest common denominator social media (such as Tik-Tok) shaves our attention span away, we all become incapable of finishing a book. I have dozens of books on my bookshelf with book markers in them because I never finished, you probably do too. It is no doubt that she will never finish this book either.
Anyways…
She makes the equivalent of $24 an hour for this role. Here’s the kicker, this same job in 2010 (or an equivalent) was also paying $24 an hour. Jobs like this at companies like this are not keeping up with inflation. One reason for that is competition. Entry level jobs at major companies offer significant perks (as you see in the video) and a relatively relaxed work-style. They get to be picky about who they hire (GPA above 3.5 probably) and get to keep their entry level salary low. When you hear people complaining about being unable to pay off their student loan debt, this is why. $24 an hour out of college is not a lot of money today. For reference, when I graduated college, my first job paid me ~$24 an hour in 2016, but I also got a bonus based on performance that topped out to another 25%. That same job that I got had paid my boss $24 an hour when he was hired there in 2006.
What worked quite well in the 2000’s and early-mid 2010’s does not work in the 2020’s. Especially if you are forced to live in a big city to do it. This is one reason why key advice for people that are new to the workforce is to constantly switch companies after 2-3 years. I increased my after-tax take-home pay by ~40% 3 years after I got my first job by simply making a lateral move, and I could have done the same thing in 2021 again, except I refused to get vaccinated (for a 100% remote position). You can do this about 3 times before you need to move up to a higher position. That is the only way to survive, and this may sound harsh, but if you got a degree, entered the corporate world and didn’t make it to $100k within 5-6 years, you did something horribly wrong… and that’s okay, probably because no one told you.
You might be asking yourself why I’m on this tangent and not telling you about the re-pricing of labor. I am telling you, just in a round-about manner. You need to understand the above to understand a few things about the white collar head-space. It’s mostly people who have been fed a lie are bought into it fully and being under-paid compared to their peers because they are trying to play office politics in the same job for 10+ years while pretending to not see that the people making lateral moves are far outstripping them in terms of pay… but then again, you’re not allowed to talk about pay with your co-workers because it shatters any illusions about loyalty they may hold.
2. The Entry Level Problem
So I’ve painted the picture about the sort of desperate game you have to play in the corporate space if you want to actually get up to the top 10% of pay. It’s not enough to simply graduate and just work in the same place for a decade unless your parents are bankrolling you. The people that are struggling with their student loans are struggling for the same reason they got their college degree in the first place, because they believe what they are told without much question.
Now remember that entry level pay for these “sought after” College grad jobs is basically stuck at $50k a year ($24/hour) except for a few engineering roles. At the white-collar level, managers discovered during CovID that they needed far less staff, and that they could adapt to fully remote with much more flexible work hours. I worked for a company where our primary office had 700+ employees when the lockdowns hit, and we shifted to fully remote at the snap of a finger (we did so very poorly). My US team was in Boston, Los Angeles, Sacramento, Portland, Maine, and NYC. But we were forced to lean on international coworkers in Oslo Norway, Madrid, Lisbon, and Ulsan South Korea. The call schedule was hell, but management learned that having an American for an American project was mostly meaningless. At best 1-2 people were needed in the project area to keep travel costs down for local events, and beyond that we were unnecessary. It won’t be too long for publicly traded companies to learn that remote positions can be held by anyone and that workers in Brazil and Argentina require far less pay and are essentially on US time-zones, and that comparable talent exists in Nigeria, the middle east and south east Asia for far less. We’re at the tail end of the era where a US bachelors degree can afford some level of luxury.
So entry level white-collar work salaries have been falling against inflation for ~10-15 years. Meanwhile, a new phenomenon emerges in hard labor and unskilled labor. It can’t be outsourced, and there is a significant shortage of this labor, in part due to a cultural disdain for it, and in part due to the status and luxury that entry level white collar work could achieve. Also in part due to trends among the youth (15-24 years old). Kids are far less interested in drivers’ licenses today than they were in the past.
This data only goes to 2018, but I suspect that in the last 4 years this trend has accelerated significantly after the CovID lockdowns occurred. It’s an extremely familiar story for me when I consider my friends sibling in the 16-24 age range or my own cousins and stories I heard from coworkers. When I was 16 I rushed to get my drivers license because it was the only way I could go anywhere on my own, and this was likely the case for most high schoolers so that by 18 the majority had a license if not a beater car. Not to mention, used cars were really cheap back then. For less than $1,000 you could get a running car ~15 years old. For $5,000 you could get a decent car ~10 years old.
Today those prices for used cars are a pipe dream, rideshare apps exist, a significant amount of children’s friends are now online while 15 years ago they would have primarily been local, the lockdowns pushed a large chunk of a teenagers life online or almost entirely from within the home.
So it follows then that a large chunk of the people that typically make up the entry level of the work-force are simply not there. What was your first job, and when? In high school, I worked as a bagboy at a grocery store, and as a dishwasher at an Italian restaurant. In college, I worked as a cashier at a grocery store, as a lot lizard at a car dealership, and as a telemarketer for Comcast. Those jobs in high school mainly paid for my car, and for me to hang out with my friends. In college those jobs paid my living expenses. If I didn’t need a car, and wasn’t hanging out with friends I probably wouldn’t have been as interested in working. The truth is that the need to work is partially tied to the increasing independence a teenager and then an adult desires. A portion of the population has parents that cannot provide for them, and so acquiring independence of some sort is a matter of life and death. Changing social trends do not steer these teenagers and young adults away from entering the work force regardless. But for the rest of the population whose lives have moved further online and whose parents have a home with a spare room, the call for independence and to move out decreases. Not to mention inflation makes the move out more difficult each year (but not impossible). So as the drive for independence decreases among those that typically comprise the bottom rung of the labor force, it creates a significant shortage, drives labor prices up and shapes industry as the economy twists in an attempt to meet this distortion.
Now consider, we’ve discussed a portion of the population that don’t have cars or drivers licenses and are probably not pursuing work at these levels. What about those who did get cars and do have drivers licenses? Well, in the past 8 years rideshare apps and 3rd party delivery services have created an alternate income path for people with cars who otherwise might have been considering being part of the unskilled labor pool. Not only do you get to choose your own hours, you also have a slightly higher jump in status compared to being a cashier at McDonalds or something of the sort. So the labor pool is not only smaller in the 16-24 age group, but its also seeing competition from uBerEats, Lyft, DoorDash, and others. uBer claims that it has 3.5 million drivers.
This is most likely a global figure for drivers, and the US number is lower. This number also does not distinguish those who drive part time or intermittently. We don’t know how many are full time US driver. Even if the number of full-time US drivers is 100,000 or 1,000,000, it’s irrelevant. These are people who are plausibly less concerned about getting hours in the unskilled labor market than they otherwise would be if uBer and rideshare didn’t exist. Even 1 absent worker is felt.
3. The Gaping Hole
In the section above, I’ve provided a potential thesis for one reason why there may be a labor shortage occurring at the bottom rung of the labor market. For the time being, it’s (mostly) contained to the entry level, but it’s starting to creep out into the next levels of labor (blue collar), while white collar labor is about to be exported abroad. The coming exportation of white collar labor will probably be one of the most significant consequences of the 2020 recession and the official recession that we entered in January 2022 (which they will announce at the end of this month when they finally figure it out).
When I surveyed my friends on Instagram and my followers I received quite a few responses that show how this is impacting labor markets. And to be clear, this seems to be endemic across the entire west, and not just the US. You can review the responses in Section 6, we had a few from Australia, Canada, The UK, and New Zealand.
At $20-$25 an hour this is challenging entry level white collar labor, and considering that they are still struggling, this means that the price for this labor is actually higher still. For those of you renting an apartment or home, you may be noticing significant delays to non-essential maintenance. I suspect that’s because what the user above is noticing at his department is probably repeating all over the western world.
The user above also included a link to the hiring page for Acme’s warehouse as a stocker.
Compare this to the example in Section 1. Linkedin is paying $24 an hour to live in Chicago with a college degree after competing for the role. Acme is paying $20-$24 an hour for employees to live in Denver, Pennsylvania, where rooms seem to be renting on craigslist for ~$550-$600. While a room in Chicago on Craigslist seems to be averaging around $700-$800. This is a negligible difference, but if you click through the link to work in the Acme warehouse, you can see that the job posting has been up since January 14th 2022. Have they filled it? Or is turnover so bad that they have failed to retain enough stockers in the warehouse? I don’t know the answer to that, it could also be that HR is lazy/understaffed and have not taken down the job listing despite it being filled, this is also a common occurrence.
One big problem that occurs among many blue collar industries is that due to messaging presented to children born in the 80’s and 90’s about college being the path to success, there currently is no next crop of blue collar workers in these industries. From pipe-fitters, toolmakers, and even to some blue collar positions that require a college degree.
For instance, in my last professional role, we were staring down a massive hole in the maritime labor force. Due to certain regulations, labor done by marine vessels in US waters can only be done by a US flagged vessel with a US crew on board. This significantly constrains the market, but beyond that, we have a huge shortage of maritime engineers in the US. There are essentially two paths you can take as a marine engineer, one of those paths puts you on a boat for some very necessary but uncomfortable work. The other path puts you behind a desk. Much more comfortable, stable, and opportunities still exist for great pay. Obviously most marine engineers choose the desk path, it’s family friendly, and has a better work-life balance. But if a certain industry wants to ramp up actual vessel operations requiring US vessels and US crews, there simply isn’t the capacity to do this in any appreciable volume here. For the entire 2 and a half years I worked with my previous employer, we never came close to solving this problem, and when I quit, it was still looming over all of our future project plans. None of our financial models accounted for a significant failure to procure properly staffed vessels for complex engineering work offshore despite it being a real possibility. Most of the marine engineers were 40+ and 50+ years old. You could even say that I am part of the problem, I had a similar choice when I graduated, field work or desk job in a big city. I chose the city. I’m less pointing fingers and more describing a cultural problem. As a country we have turned our backs on manual labor with the presumption that it would be there when we needed it. We’ve taken it for granted in much the same way that we’ve taken food and energy for granted. Manual labor has been underpriced compared to how much it actually costs to attract someone into those tasks, and especially compared to how much society is willing to pay to have those tasks completed.
We haven’t had a famine in the west for nearly 100 years. The memory of such has fallen out of our collective consciousness. Regular blackouts and intermittent electricity delivery is also far outside of the western consciousness. When Texas lost power for 1-5 days (depending on the part of TX) in 2021 because of a freak 100 year snow-storm you could see in people’s reaction to it just how far removed our society is from the concept of irregular electricity delivery. The concept that the grid could go down during a 100 year storm was seen as an outrage and unacceptable. When really it should be something that people are prepared to handle just in case. I’ve personally made the decision not to winterize a half billion dollar utility scale energy project I was on the development team for in the US because it would have driven end user energy prices up ~40%. It’s not worth it (and we would have struggled to compete and generate a return in the market) to pay that much just to generate electricity for an extra 15 days over a 50 year period. People take electricity for granted and do not concern themselves with how it is made or the tradeoffs in decision making that are involved in such.
Similarly, we have not had a major shortage of unskilled and skilled labor for decades. Corporations have been in support of an open border policy for decades because it drives down labor costs across the board, at the detriment of those working in the US labor market. Over the coming years we will likely see a combination of factors coming together to create a storm that most will not be able to see coming or to comprehend. I fully expect the labor force in the US to completely re-shape itself in reaction to these factors.
Global freight costs and transport costs means that global manufacturing does not have the same advantages over domestic manufacturing that they’ve enjoyed for the past 4 decades. Where previously a wage of $20/hour for labor at a manufacturing plant would have it’s margin eaten out from under it by political and religious prisoners enslaved in China, today vessels are extremely delayed, and the Baltic Dry Index is about 4x as much as it was pre-pandemic, and that’s despite being down 3x from the highs in 2021. The Baltic Dry is an index that serves as an aggregate for base shipping costs. Not to mention with diesel prices extended, it is much more expensive today to ship goods by rail into the country from the coast. And that’s if the goods desired are even available globally. Often they aren’t, and if they are, it’s half a year to a year for the procurement timeline from order to delivery. There is a massive opportunity for domestic manufacturing to step in and to find what the real market price of skilled and unskilled labor actually is. I expect that many in the white collar sphere will make the jump.
And I expect this to be exacerbated by the continual exportation of white collar jobs. If the work is purely digital and no shipping is necessary, then Americans still can’t compete on the global marketplace. Those jobs will be replaced by South Americans, Africans, and Asians with laptops. To cut costs during the recession that will officially be said to have started on June 31st, 2022; most companies will turn towards their bloated white collar workforce. The lessons learned from remote work is that there is no reason to hire an American for a 100% remote position. And after the layoffs, this part of the labor force, when it is rehired will likely be 80% foreign. We’ll be competing on a global scale in the white collar sector, while the blue collar sector will be more insulated from global competition. It’s almost a complete reversal of globalism and the pre-pandemic economic realities.
While the question of how do we meet our domestic needs is going to be the pressing one that Americans will have to address directly.
It won’t be too long before companies and employees figure out this asymmetry. With inflation continuing, and the 2nd half of 2022 likely marked by extended layoffs in the white collar sector we will likely see workers making career shifts out of desperation to put food on the table, and with opportunities like this continuing to spring up there will be places for them to go if they can humble themselves enough to make the shift.
A lot of people left the labor force in 2020. At current, ~3 million of those that left still have not came back to the US labor force.
The changes in compensation for unskilled labor and skilled manual labor will likely continue to drive inflation in the future, but it seems as if raises among skilled manual labor might be able to keep up with this inflation.
Take note. Two separate welders, both saying they were seeing annual raises of $4 an hour, which amounts to a 20% raise each year. Why weld if McDonalds is paying $20 an hour? The only choice employers have is to raise wages for welders, and to compete to poach welders from their competition. This is the only outcome for the necessary labor that can’t be cut or laid off.
Wind turbine technicians can simply not be replaced. The operating budgets can be re-written if cuts are made elsewhere in order to pay the increased wages required to keep the technicians happy. And that’s exactly what will happen.
4. Automation and Manufacturing Renaissance
So we’ve discussed how the labor force might react to the current market distortion, but we also need to consider how employers will react. Businesses can’t stay in this position forever where there labor pool is strained and turnover rates are extended. Constantly hiring and training new employees is expensive. They’d much rather prefer to keep you employed at the same place for 10 years for a number of different reasons than to constantly replace you every 6 months.
The short term solution for employers is to raise starting pay until as in the example above they eventually can get back to being fully staffed, even if that staff may be bottom of the barrel.
But the long term solutions are creative applications of automation. The following excerpts are from a longer conversation I had with an individual responsible for managing supply chain for a number of restaurants in the SouthEast US. Take note of how quickly they have adapted and manufacturing capacity has started to emerge to fill a portion of the hole in the labor market as well as replacing production from China.
The conversation starts sounding relatively normal. I’ve noticed that the SE US has been the least impacted by changes to the labor market, with Georgia and South Carolina still showing a floor for labor in the lower teens.
You’ve probably seen videos of the robot that fries french fries, or the automated burger machine as a sort of cheap fascimile of automation. Even some proof-of-concept restaurants where the automation is extremely in your face (like the Moscow KFC example below) while these are likely not actually commercially viable examples of automation.
The reality of automation is in identifying a simple repetitive task and replacing it entirely with a machine. In the example in the DM above, the IG user mentions pre-assembly being automated prior to delivery. This is the low-hanging fruit. If you’re going to make an eggroll at your restaurant anyways. Why not have it pre-wrapped and sent in one shipment rather than receiving all of the ingredients in separate shipments? If you can automate enough tasks like this, you can eliminate how many man-hours you need to hire for because you don’t have people wrapping wontons in the kitchen anymore. What may have required 120 man-hours for a day of work (10 employees across an 12 hour window (10am-10pm), might now only require 96 man-hours and this same restaurant can now operate with 8 employees in a day instead of 10. Labor is the largest cost most restaurants face with it representing usually 25% of the budget. Restaurants are one of the most sensitive industries to changes in the labor market, and one of the industries most benefitted from efficiencies in the labor force. A 20% decrease in labor costs at a restaurant can result in a 5% increase in the profit margin. These are not efficiencies to sneeze at, especially in our current market.
Consider the point the user makes about standardizing portions being a significant value add to the business model. If they can decrease over-portioning of rice by an ounce per serving from implementing a sushi robot at each of their locations, it amounts to a $10,000 a year gain. Having a sushi robot taking over this one process at each restaurant amounts to a significant gain on their operating budget. These robots pay for themselves just in avoided losses. If the labor rate they have to pay is $20 an hour, then their actual cost as an employer could be upwards of $35 an hour per employee. In an economy of shortages, such automation may not simply be profitable, but necessary.
The tone of this article so far could be interpreted as negative. After-all, anytime someone says there is a shortage, it typically conjures images of empty shelves and long lines in peoples minds.
Instead, what this actually is, is an opportunity for domestic manufacturing to step in and increase capacity. As factories like the one described above begin to see significant orders like the ones this restaurant chain has been putting in there are a significant amount of people seeing this data and making decisions. When factories are having to choose which orders to get rid of, they’re noticing patterns. If there is significant capacity being demanded for the same type of thing that they previously weren’t receiving. Then when they decide about how to expand or what type of factory to build next, they’re going to construct capacity for the orders they are getting the most of, so that they can be the ones to consume their own outstanding orders, rather than losing them to competitors. I fully expect to see domestic manufacturing in the center of the country (near rail) to pick up as restaurants, grocery stores, and others who deal with unskilled labor find ways to fill this hole.
The current shortage in the labor market is going to be relatively short-lived. Opportunities to make jumps to increase pay are transient. For the white collar crowd, we are likely already past the point where big opportunities for lateral raises were the name of the game. For blue-collar labor, this will probably continue for 2-4 years until the domestic labor market has to adjust. Or… if domestic labor does not adjust, domestic demand will have to adjust instead, and we’ll see decreases in the quality of life within the US. Personally, I see businesses pivoting in significant ways. The example in this conversation is a company that is an early mover in this space, but the rest will likely follow in any way that they can, at least if they have competent white collar labor and the flexibility to allow their work-force to leverage their creativity to solve problems. Not all Domestic businesses will survive. Many domestic businesses will simply fail to adapt, they may even have the quality of white collar employee to identify the problem and outline solutions but they’ll be too much of a bureaucratic behemoth to make the shift in time. Too big to fail always seemed like a misnomer to me. Once companies get so big, there is nothing else they can do but fail.
Unfortunately, our government is so afraid of any sort of failure, that we are actively spending the productivity of our citizenry to prop up companies that lack the strength to prop themselves up. I ask, which way will we go? Is this going to be a decade of stagnation, or will we be reminiscing about how we changed, adapted, grew, and shook off our shackles in the 2020’s?
5. Conclusion
I do my best to avoid taking any sides when it comes to politics on this substack. Mainly because most of the problems I describe transcend politics and have been endemic regardless of which party is in power here in the US. But I will state that the current administration is not equipped to encourage the kind of domestic labor development required for us to innovate our way out of the impending recession. As such, I expect that the majority of the benefit’s that are realized by adapting to the current environment will be limited to a few states and areas, while a few states and areas will take it directly on the chin.
I want to say that we’ll be celebrating the turning of these tables over a glass of Little Rock Vintage Sake, but I can’t tell the future. But when you think of this future, be mindful that Silicon Valley didn’t rise up until after the rust belt fell into blight. If things are to change here again, it will coincide with the collapse of areas that previously represented prosperity, and the emergence of prosperity in areas that were previously ignored. It’s K-shaped.
6. Instagram Responses
I’ve included 57 responses and conversations below if you wish to read through them raw. Take into consideration, these are all anecdotes. Some may be people exaggerating or mis-remembering. Some may be intentionally mis-leading me. But consider that when people spontaneously respond to the same message and say the same things without seeing each others responses, we can presume there is some truth behind them. Kind of like how when police separate 4 suspects and ask them to say what happened without hearing each others story. If they all say the same thing without organizing first, then it’s likely true.
Note as well the claim that the public transport system shortage of workers in Boston is leading to significant platform delays for people riding public transport.
Jackson Hole is a major tourist area, and is severely squeezed on housing supply compared to demand. Very few people working at the bottom of the labor market can afford to live here.
Great article. I have one thing to add. In addition to everything you mentioned we are experiencing a decline in the number of overall workers (globally).
We’ve hit the apex of boomer retirement, currently we have a large generation (a significant portion of which held blue collar jobs) leaving the workforce. The replacement generation (gen Z that is just leaving college) is significantly smaller.
I expect the positions that provide real value are going to have pricing power. I work in healthcare. Over the past decade there was an explosion in hospital admin positions but the necessity of these positions is unclear. When in comes down to it MDs/nurses/techs are necessary for healthcare (can’t realistically be automated away anytime soon). The nursing shortage is currently limiting bed capacity/ability to do procedures. Nurse salaries have already increased but the shortage persists. I expect admin positions will be cut in order to further increase provider salaries in hopes of dealing with the shortage.
Utterly fascinating. I'm still trying to fill positions, hit me up if you need an unskilled job in Dallas frens.