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Second, while the ageing of society has been a disinflationary driver in past decades, when combined with falling dependency ratios (ie fewer workers for each older Australian, as highlighted in Australia’s recent Intergenerational Report), it arguably turns inflationary. There are fewer workers keeping the economy going.
Third, there is some chance we are not as productive as we were. This could relate to an infrastructure network failing to cope with rising populations, while some would point to the distractions associated with working from home. A post-pandemic world has also led to a sharply higher annual rate of sick leave, for obvious reasons.
Finally, some analysts are speculating that “workplace policy” isn’t helping. Gary Banks, founding chairman of the Productivity Commission, recently opined that “workplace regulation has been regressing towards the sort of centralised, prescriptive regime that preceded the Hawke/Keating reforms”, limiting the ability of companies to become more productive.
There’s little wonder with businesses facing experienced workers “checking out” from the workforce, and some increases in absenteeism, that business may be hoarding (good) labour. The cost of that labour has also risen, with two years of above-average minimum wage increases, a higher superannuation rate and higher payroll taxes in some states.
This is a world where a company’s wage bill can quickly get out of control. Indeed, Australia’s recent equity reporting season, despite resilient revenue growth, saw margins pressured by “the cost of doing business”, mostly higher interest rates and rising wage bills.
Looking backwards, if the past 30 years of deregulation has shown us anything, it is that competition (both at home and from abroad) delivers better, more agile and more efficient companies that produce superior customer outcomes, create customer retention and superior shareholder returns.
Reduced flexibility in the jobs market, or decisions by governments to limit competition (as we have recently seen in the airline industry) are not typically associated with such outcomes.
Structural trends in the jobs market that are likely to keep increasing the cost of labour seem destined to have an increasing impact on the relative profitability of companies.
Those most likely to be in the strongest positions are those with a low labour cost relative to revenue or operating costs, or those less exposed to minimum wage increases than other sectors. UBS believes the relative “winners” here are the energy and utilities sectors, as well as building materials and steel sectors. In contrast, sectors most exposed to labour costs include transport, food production and engineering and contracting.
Those in sectors that can become quick adopters of artificial intelligence are also likely to be in a better position to control costs. The technology sector is interesting in its own right, typically benefiting from structurally better pricing power due to reduced outsourcing, reducing globalisation and lower immigration, according to Credit Suisse.
The period ahead could potentially result in a multi-decade swing towards shareholder returns, and away from labour returns, partly due to structural tightness in the jobs market. Portfolios will need to focus more on a company’s ability to control labour costs (or enablers of this), and create customer retention, to deliver sustained profitability.
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