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Tightening labor market no surprise to big business: report

Jefferies analysis of earnings calls finds less concern among execs than in the past

The tightening labor market appears to be causing less concern in C-suites than in the past, a report from research firm Jefferies indicated this week. 

While the Jefferies analysis of third-quarter earnings conference calls released this week found anecdotes of higher wages, increased turnover and entire states with “labor markets so tight that businesses' ability to expand has been impaired,” the labor tightness was mentioned most in the hotel, restaurant and leisure industries. 

But mentions were down year over year, the analysis found. Of the companies Jefferies analysts cover, they found 109 cited wages as an issue in the third quarter of 2016 but that dropped to 79 in the third quarter of 2017.

“It's certainly not that wages are falling, but rather it seems that rising wages are no longer surprising as many companies as they once did,” Jefferies analysts wrote.

The U.S. unemployment rate was 4.1 percent in November, according to the Bureau of Labor Statistics, holding steady from October.

The Jefferies analysts said they had seen “a decline in the use of terms suggestive of wage tightness/headwinds on conference calls” year over year and trends in restaurants had been improving.

“Growth in average hourly earnings remains well above cycle lows and stopped accelerating in mid-2016, but the prior acceleration seems to have caused companies to plan for higher growth, invest in labor-saving technology and simply to schedule labor better, all of which reduced the tendency for labor to be the source of a negative surprise,” the Jefferies report noted.

Executives at Oak Brook, Ill.-based McDonald’s Corp., for example, said in an Oct. 24 third-quarter call that they were investing in labor.

“There is some commodity inflation, but the biggest drag that we're facing right now is related to the labor investments that are being made,” said Chris Kempczinski, president of McDonald’s USA.

“I think one of the pieces that remains to be seen for us is just what does the long-term labor inflation look like in the U.S.,” Kempczinski told analysts. “And so, we have seen with roughly 5 percent unemployment that labor inflation has been ticking up nationally. In addition, there's local legislation that's going on as well, where minimum wage laws are increasing.”

Kempczinski said McDonald’s was investing in training over the next six months to a year. “And I think the longer term is we just need to keep our eye on labor inflation across the U.S.,” he cautioned.

Starbucks Corp. executives echoed that they too were increasing investment in their workers’ wages as well as digital platforms.

“The vast majority of that wage investment we're making is not mandated. It's not minimum-wage driven or mandated by cities or states,” said Scott Maw, Starbucks chief financial officer, in a November conference call.

Maw said Starbucks’s investment in workers was paying off.

“We have turnover rates that are significantly below everyone else in the industry,” Maw said. “We have seen turnover in the last year come down across every category within our stores.”

Starbucks plans a lower investment in wages in 2018, he said.

Contact Ron Ruggless at [email protected]

Follow him on Twitter: @RonRuggless

TAGS: Operations
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