10.28.2021: It’s been almost eleven months since the first Americans were vaccinated against COVID-19 and growth is expanding. Yet there are five million fewer US workers employed in today’s economy than were employed jobs pre-pandemic. Many have retired, others have picked up gig work and many may have elected to remain at home with their young children. What remains is a war for labor in a shrinking talent pool, with the largest, most profitable companies, like Walmart and Amazon, paying upwards of $16/hour for entry-level work. Leisure and hospitality employment, representing service jobs in hotels, restaurants and travel, holds 1.5 million fewer jobs today than at the beginning of 2020, according to the Bureau of Labor Statistics (BLS). At the same time, employers in the sector are actively recruiting for 1.7 million open positions.

Business leaders learned to be flexible in last year’s pandemic environment and they’re keeping their dancing shoes on in today’s post-pandemic world. The pandemic accelerated other trends that were already in place, like remote work and telemedicine. Employers are continuing to innovate as labor markets remain tight and supply chains are crimped.

One example is fast food giant McDonald’s. Though it has lagged its competition in recent years in terms of innovation, the firm has opened food ordering kiosks in over six hundred locations to streamline operations and offset higher wage costs. The software, programmed to factor in local weather conditions, can make menu suggestions based on temperature and other conditions. The technology can also recommend certain menu items based on time of day: breakfast foods and desserts get special treatment when it’s very late at night or very early in the morning. Most important, food ordering kiosks enable franchisees to operate with fewer employees.

Business investment is on the rise and enhanced productivity and profitability will likely result. Business fixed investment has risen to 18 per cent of GDP, representing a 19 per cent spending increase over the 12 months through June. The offsetting productivity increase has insulated employers from rising labor costs. According to BLS data, average hourly wages rose 4.6 per cent year over year through September.  Yet employment costs, thanks to increased productivity, expanded only 2.9 per cent over the same period.

We expect business investment funded by cheap financing to continue to pave the way toward enhanced productivity and stronger profits, two critical ingredients for risk taking. We expect employers, through business investment and innovation, to more than offset their higher labor costs. In fact, profit margins have steadily expanded over the last year across all equity market capitalization categories. Eventually, higher interest rates could undermine the virtuous cycle as inflation trends accelerate, sending a worrying signal to bond investors and Federal Reserve governors. As long as the 10-year Treasury yield remains below two per cent, equity risk taking will likely continue.