Last week, we saw the United Auto Workers strike all three major U.S. automakers at the same time. This was an unusual move and the fact that specific plants were chosen may indicate a strategy that could last some time. This isn’t the first labor action in 2023. We’ve seen airline pilots, package delivery drivers and actors asking for better pay and benefits. In each case, there are similarities to the others. Inflation and economic disruption are partly to blame. Technological advancement also has a hand in these actions.
Last week’s updated report on consumer price inflation showed a 3.7% year-over-year increase which was a half point higher than last month due to higher energy costs. Energy inflation was over 6.7% on an annualized basis. Oil prices have risen considerably over the last year, with West Texas crude moving from below $70 per barrel to over $90. The chart below shows West Texas crude prices over the past year. It’s now about 6.7% higher than one year ago, but still lower than last November.
The impact of food and energy inflation on consumers has been real. Many people perceive —accurately—that their wages have not maintained pace with the increases in their cost of living. A study by the St. Louis Federal Reserve Bank noted that in 2022 more than half of workers saw an average 8.5% decline in their real wages (adjusted for inflation), the worst decline in over 25 years.
All told, though inflation expectations have declined over the last year, the recent increase in energy costs and elevated home prices cause workers to feel a worsening pinch.
For most of this year, economists and pundits have debated about whether or not the economy will experience a recession. In January, consensus was that we’d see two quarters of economic contraction during the second half of the year. Of course, that hasn’t happened. We can see now that post-pandemic efforts by the government to stimulate the economy not only resulted in high inflation but allowed the economy to continue growing despite a substantial increase in interest rates as orchestrated by the Federal Reserve.
As noted in past commentaries, the impact of direct wage support and a tight labor market (the unemployment rate has been below 4% for over a year and a half) has resulted in above-average wage growth, though not enough to offset the high level of inflation. Not to mention the increase in the cost of money because of the Fed’s efforts to raise rates.
While the economy has avoided a recession so far, there is mounting evidence that consumers are having trouble maintaining the same level of spending and their default rates on things like auto loans and credit cards are rising. At the same time, the number of jobs being created each month has continued to slide reflecting a weakening labor market.
As the economy begins to show signs of weakness, workers feel the air running out of the job market and not surprisingly have become more interested in protecting their jobs and the wages and benefits that come with them.
Auto workers have noted that their industry is in transition. While the current Administration has pushed legislation that continues the electric car subsidy, the union points out that an electric car requires approximately 30% fewer laborers. Auto companies have made it clear that they will continue to move toward a larger percentage of electric vehicles over those with internal combustion engines. Certainly, the call for increased pay and benefits is somewhat a function of the reduction in labor needed to build cars well into the future.
At the same time, we’ve heard about AI or artificial intelligence nonstop since the fall of last year. As people begin to wonder what it means for them and their roles, workers feel the threat of a tougher job market and may require higher pay and more certainty around how AI will be used in conjunction with their own roles. The Screen Actors Guild is a great example of this. Actors are asking the studios for some guarantees that if their likeness is used they be able to license it for as long as the content is being distributed.
Labor disputes like these will continue to be the norm as our economy learns to cope with the technological disruption that comes with AI.
Three main drivers of labor unrest
To sum up, labor unrest is a function of the effects of:
- High inflation and wages not keeping up
- Concerns over the possibility of recession and the potential increase in unemployment;
- And the disruptive nature of new technologies also play a part in workers looking for some protections.
These issues will remain with us for some time and suggest that labor disputes have the potential to disrupt normal economic activity.