Monday, February 28, 2022

Shortage

Silicon chips are in short supply, ports are congested, and as a result new cars are expensive. The shortage of new cars has more people buying used, and as a result, used cars are fetching ridiculously high prices as well. The same phenomenon of supply shortages and logistics bottlenecks have been playing out across lots of basics, manufacturing and agricultural industries for months now.

At the same time, we have M2 money supply like we’ve never seen. All that cash is pursuing few investment opportunities, which bids them up. Excess liquidity seeking returns has inflated assets from designer watches to corporate equity.

Supply shortages twined with excess capital have created inflation like we’ve not seen in nearly 40 years.

Included among the supply shortages is labor. The headline numbers in the labor market have been the number of people leaving the workforce and the labor participation rate: fewer people of eligible age are working than before the pandemic, and many have simply checked out of the labor market forever, electing to live off savings rather than income. This means those who are working can command higher wages. In the absence of productivity gains, higher wages contribute to the inflationary cycle, because producers have to pass the costs onto consumers. Inflationary cycles can be difficult to stop once they start.

But labor market tightness can do something else: it can be the genesis of innovation. When a business cannot source the labor it needs to operate, it innovates in operations to reduce labor intensity. By way of example, businesses contracted their labor forces (including the ranks of their core knowledge workers) in the wake of the 2008 financial crisis. While this reduced corporate labor spend, it put remaining workers under strain. Soon after the reductions-in-force, companies invested in technology to lock in productivity gains of that reduced force. Capitalizing those tech assets reduced their impact on the income statement while those investments were being made. Once recovery began and revenues rose, that tech kept costs contained, resulting in better cash flow from operations after the financial crisis than before.

We are potentially in an inverse of the same labor dynamics. Whereas in 2008 the corporate innovation cycle was driven by corporate downsizing of the labor force, today it is driven by the labor market downsizing itself. And just as in 2008, when it was a secular problem (finance had an abundance of labor, while tech did not), it is secular again today.

Among the labor markets suffering a supply shortage is K-12 education. Education has become a less attractive occupation since the pandemic. A highly educated cohort disgruntled with work is an attractive recruiting pool for all kinds of employers.

The exodus of people from the teaching profession has created a shortage of teachers. The K-12 operating model is based on physical classroom attendance of teacher and student at increasingly high leverage ratios - 20, 30, 35 students to one teacher. This model becomes vulnerable with a scarcity of teachers. Classroom dynamics - not to mention physical facilities - don’t scale beyond 35 or 40 K-12 students in a single classroom. If there are fewer people willing to teach in the traditional paradigm, then the teaching profession will be under pressure to change its paradigm in one way or another.

I’ve written before that technology is generally not a disruptive agent. Technology that is present when socioeconomic change is happening is simply in the right place at the right time. Where there are acute labor shortages today - public safety, education, restaurant dining - the socioeconomic change is certainly afoot. What isn’t obvious is whether the right tech is present to capitalize on it.