Baldwin Investment Management

Replacement Parts…

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For some there has been for several months a “return to work” hesitancy. Unemployment benefits too generous, Covid worries too great, schools closed and childcare services too hard to find have all been reasons cited as to why many have not returned to work. Employers, facing labor shortages, have been forced to “pay up” to get workers – even while there remain millions who are unemployed and millions of jobs “going begging”. It is a curious situation, but one which will “sort itself out”- innovation will help enable a solution.

Many of the jobs lost during the pandemic-induced recession were service oriented and low wage. Shopkeepers, waiters, bartenders, and others like them lost their employment because people stopped visiting their places of business. The owners of these enterprises had to adjust to the drop-off in business; so labor costs were cut. However, as business started to improve, numerous owners found what they believe might be a more productive way, a more profitable way to restart their enterprises – by substituting technology for labor. Some firms were already on the “replacement” path before COVID, but the pandemic sped the process of conversion and pushed them “over the edge”. QR codes are now used more often for people with cell phones, who can walk by a shop window, scan an item they see in the window to find out about features and price, instantly purchase the item and stop by the store later to pick it up. Having a “floorwalker” in the store to help people has become somewhat redundant and perhaps not necessary. Restaurants are also experimenting with QR codes and order management systems that allow diners to order their food from their table on their phones instead of from waiters – speeding the ordering process and food delivery to the table while cutting down on the need for too many waitstaff. Grocery store chains have increased their use of self-checkout kiosks that replace cashiers (Note, even I have used this technology at a nearby ACME market). Further down this tech path is computer vision technology pioneered by Amazon Go which allows customers to make purchases without standing in a checkout line at all.

This shift or replacement probably means that many of the 1.7M leisure and hospitality jobs and 270K retail jobs lost in the U.S. since February 2020 are unlikely to return. Labor economists note that this replacement phenomenon has happened during economic downturns as tighter margins force businesses to become more productive with fewer resources (i.e., fewer numbers and more expensive labor). Automation enhances business productivity and profitability. It also benefits those employees who remain employed while replacing some with repetitive jobs.

Federal Reserve Chairman Powell recently spoke at the annual central banker/economist retreat in Jackson Hole, Wyoming and again sounded very “dovish”. His focus is not only on inflation but also full employment. He declared that substantial progress has been made towards the Fed’s average inflation goal of 2%. He added that while progress has been made regarding the Fed’s full employment target, much more work needs to be done, with his citing the number of unemployed still. Having people being replaced with automation is certainly going to slow U.S. progress to the Fed’s employment goal. This, along with COVID outbreaks and dampening consumer sentiment possibly slowing the U.S. economy, could well keep interest rates lower for longer than some might suppose.