9.20.2023 – In a free market, where investment and risk taking are rewarded, who’s entitled to productivity gains, which are the byproduct of innovation – labor, or capital? Employees argue their income increases should reflect their more productive output per hour, while their bosses believe that innovation is the result of capital risk that should be rewarded. Economic textbooks assert that the supply and demand for labor (its “elasticity”) explain the allocation of productivity gains between employee and employer. Labor unions, through collective bargaining, are an attempt to increase the workforce’s share of productivity gains by restricting the supply of labor, among other things. With major union actions currently in the headlines, we examine the long-run outlook for the battle of labor vs capital.
In a widely anticipated action, last week the United Auto Workers (UAW) went on strike, strategically targeting one plant at each of the Big Three auto companies. Their move involved 12,700 workers, or about 10 per cent of their membership. The UAW joins the 11,500 members of the Writers Guild of America, which has for months been on strike against the Alliance of Motion Picture and Television Producers. While the unions are banging the drum for higher wages – in the case of UAW, calling for a 40 per cent increase over three years – the critical issue for both auto workers and screen writers is the threat that innovation poses to jobs.
For auto workers, the threat comes from the industry’s shift toward electric vehicles (EV). For writers, it’s the growing capability and influence of artificial intelligence (AI). The job threat posed by innovation has fueled labor disputes for centuries. The word “sabotage” – the action of deliberately and maliciously destroying property – was derived from the French word for wooden shoe (sabot). Labor disputes in France at the turn of the 20th century were spearheaded by sabot-wearing workers who violently disrupted the production of machinery that threatened their jobs (the legend of workers hurling their sabots into the machinery to gum up the works is colorful, but apparently apocryphal). In the present day, the tight labor market has led to a surge in work stoppages. The number of days of idleness due to work stoppages has surged to over 4,000. That’s three times the highest point over the last decade, and the prospect of a resolution remains remote.
History has shown that innovation has been an accelerant of job growth. While television replaced radio, the broadcast industry expanded as the small screen proliferated in American households. From the mid-1950s through the early 2000s, productivity and job growth rose in lockstep, suggesting that innovation did indeed create more opportunities. Since the early 2000s, however, the trajectory of productivity has outpaced that of job growth, suggesting that innovation and technology are destroying more jobs than they’re creating. This has increased the income disparity between skilled workers, who had the ability to ride the wave of innovation, and unskilled workers, who got swamped by the wave.
The cumulative growth in incomes and profits underscores that trend. Between 1983 and 2002, the cumulative growth in profits and personal income moved in lockstep. Though the financial crisis crushed profits, since 2009 corporate profit growth has run substantially ahead of personal income. Artificially low interest rates were partially to blame, but a significant portion of the profit advantage was the result of a greater share of productivity gains gravitating to the bottom line. Over the last 20 years, cumulative wage growth among unionized, goods-producing workers expanded 60 per cent. Adjusted for inflation, however, their wages contracted three per cent in the interim. Adjusted for inflation and productivity, their compensation plunged 30 per cent.
Meanwhile, innovation and progress continue to accelerate. Over the last several years, AI has made major progress in vision, speech recognition and generation of natural language processing, image and video generation, planning, decision making and the integration of vision and motor control for robotics. As recently as 2021, GPT-3.5 delivered a respectable 1060 out of 1600 (87th percentile) on the SAT exam and failed the bar exam by scoring in the 10th percentile. GPT-4, the next generation AI, scored 1410 out of 1600 points on the SAT and scored in the 90th percentile on the bar exam, well enough to pass the NY State Bar Exam and the exam in most states, according to a recent report in Business Insider. If Moore’s Law applies, AI’s cognitive abilities will double every 18 months.
At the same time, automobile production is tilting toward electric vehicles. As of the end of last year, more than 14 million EVs were produced worldwide, with nearly 1 million built in the US. That represents about 12 per cent of the eight million vehicles produced in the US last year. EV production is expected to double by 2025. While the transition promises to lessen our reliance on petroleum, the shift to an EV future is a threat to labor, since electric vehicles need just half the parts and a reduced workforce to build. Producing EVs requires 40 per cent fewer workers, according to Ford CEO Jim Farley. Ford aims to reach 50 per cent EV sales by 2030, up from single digits last year. EVs don’t require tune ups and oil changes, and industry analysts estimate that a typical dealer will lose $1,300 in maintenance and repairs for a typical EV over a five-year ownership cycle compared to what internal combustion vehicle owners spend.
The Big Three automakers find themselves at a disadvantage to Tesla and other EV start-ups as they negotiate with the UAW, thanks to their legacy business. Their market capitalizations per employee range between $220,000 and $280,000. Tesla’s market cap per employee is nearly 24 times that level, suggesting the Big Three, by comparison, have too many workers for anticipated production trends. Labor costs at Tesla are estimated to be about $45/hour, compared to $66/hour for the Detroit automakers, on which the UAW is seeking at 30-40 per cent wage increase. A prolonged work stoppage could widen the lead Tesla and other EV producers have in the race to electrify our roadways. Nonetheless, the UAW faces sizable risks since a segment of their members won’t make the EV transition. Undoubtedly, their bargaining power will diminish. To date, they have failed to unionize Tesla plants and auto companies, both domestic and foreign, are building new EV plants in Southern, right-to-work, states with lower wages.
Bottom Line: The tug-of-war between labor and management over productivity gains has been ongoing for decades. Over the long run, however, capital outpaces wages. We believe in long-term investments in disruptive themes and, in the public markets, owning the entire space. AI and EV as investment themes will have traction while the individual winners and losers will sort themselves out.