Communications

In a recent New York Times article, David Leonhardt contends that the U.S. does not have a labor shortage. Rather, it has a shortage of workers willing to take jobs under present working conditions.

To support his contention, he cites the following reasons:

• Stimulus payments and unemployment benefits in 2020 and 2021 have provided the resources necessary for those at the lower end of the income ladder to compile modest cash savings, which today has reached a high-water mark of approximately $1,000.
• The working class and much of the middle class have been left out of the substantial gains in income and wealth registered over the past half century, which has steadily increased worker frustration and dissatisfaction with available jobs.
• Quality of life has deteriorated for many among the working class and lower middle class, measured by such metrics as life expectancy, drug and alcohol abuse, suicide rates, and broken marriages.

In a word, a great many workers are fed up with low paying, dead-end jobs, devoid of benefits and lacking any assurance of job security. With some cash in the bank, there is no better time to seek jobs with better pay, benefits, and a brighter future - particularly when a great many employers are in critical need of workers to meet increasing demand.

Leonhardt is skeptical the shortage will continue much longer. The shortage itself has resulted in numerous instances of higher pay, health benefits, and better working hours in some segments of the economy. But the federal stimulus checks have run their course and unemployment benefits have diminished. $1,000 of cash in the bank can stretch only so far, especially in an economy subject to steadily rising prices.

Apart from the COVID impact, the shortage of workers willing to work depends on their collective ability to outlast employers reluctant or unable to offer more attractive working conditions. Leonhardt concludes that, at the end of the day, employers have the greater leverage. The absent workers, as a result, will have little choice but to return to a business-as-usual jobs market and to do so in the fairly near future.

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As The Economist notes in a recent report, the conventional wisdom in the world of economics states that expectations drive and determine inflation. Inflation is triggered by one of the two following events or by both emerging simultaneously:

• When companies expect labor and material costs to increase, they demand higher prices to cover the anticipated cost increases.
• When workers expect high prices and an increase in cost of living, they demand wage and salary increases.

One set of expectations reinforces the other. For example, if companies today anticipate an increase in materials cost because of supply chain bottlenecks and delivery delays, they tend to raise the price of their final products or services. Workers, on the consuming end of these price increases, demand greater wage and salary compensation, which compels companies to further increase prices of products and services. And the cost and price spiral continues, triggered initially by expectations.

If this cause-and-effect relation is valid, the key to controlling inflation is to control expectations about inflation. In the past three decades this task has fallen to central banks, such as the Federal Reserve. Since inflation has been quite modest over the past thirty years - excluding brief spikes during the Great Recession - it appears that central banks have curtailed inflation expectations quite effectively and, therefore, have curtailed actual inflation.

Very recently, however, a researcher at the Federal Reserve - Jeremy Rudd - published a study that contends this established explanation is all wrong. Expectations about inflation do not trigger inflation. Rather, expectations about inflation are based on observable facts and experience by companies and wage earners.

In effect, if central banks wish to control inflation, they need to focus first and foremost on the actual events driving inflation and not on the expectations resulting from these events.

Applied to today's environment, central bank focus should be on unraveling supply chain problems and controlling the steep increases in various raw materials and supply cost, if they have the ability and resources to do so. Any success they have in doing so will translate to stable or lower prices which, in turn, will result in a moderation of company and wage earner expectations about inflation. In other words, observable facts determine expectations about inflation, not central bank pronouncements.

Needless to say, Mr. Rudd's contention has set off a firestorm of controversy about the proper role of central banks and federal governments in controlling inflation.

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As The Economist notes in a recent commentary, the popular preference for flat reporting structures, triggered and sustained in part by the impact of COVID-19, eliminates middle management, which, in the opinion of The Economist, can be highly detrimental to a company's performance.There are two arguments in favor of a flat reporting structure in which the employee / boss reporting relationship is unimpeded by one or more layers of middle management:

• Too many managers inevitably lead to isolated silos within an organization, which result in a range of information, co-ordination, and production inefficiencies.
• Current technology makes it easy for a single manager to oversee and direct a vastly larger number of employees, regardless of physical location, than possible a few short years ago.

Further, flat reporting structures give individual employees more responsibility for their own performance as well as contribute to a company's ability to respond more quickly to client needs and competitive initiatives unimpeded by established bureaucratic procedures.

Experience with flat reporting structures has not necessarily supported the anticipated benefits, according to The Economist. In every flat organization an informal leader emerges among a group of employees and, in effect, serves as a middle manager. Whether the emerging middle manager is right for the job is an open question. He or she may warrant the position on the basis of competence and managerial skills, or the informal leader may have emerged based on a dominant personality devoid of the necessary skills to effectively manage employees.

As The Economist observes, the stakes are high in getting the proper managers in place, regardless of whether they are formally recognized in the reporting structure. A company may pride itself on its flat reporting structure and use that structure as a recruiting tool. But such a company must also acknowledge that informal middle managers will emerge in any group and take steps to assure that such informal middle managers possess and display the talents and skills necessary to advance the fortunes of the company.

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On November 18th, Shockproof! Training conducts Debt Capacity and Cash Flow.

The webinar's target audience are analysts and lenders interested in reviewing the fundamental considerations that shape the concept of debt capacity, in examining methodologies for computing estimates of debt capacity, and in identifying the differences between debt capacity and cash flow.

The webinar complements and extends the body of analysis addressed in the Credit College Course on Cash Flow Statements and Cash Flow Proxies. It addresses and explores:

• The concept of debt capacity and its importance in assessing a borrower's prospects for properly servicing its interest-bearing debt.
• The roles of dividends, distributions or withdrawals, income taxes, and loans to owners or partners in arriving at an estimate of existing and prospective debt capacity.
• The reasons for apparent conflicts between debt capacity estimates and actual operating cash flow.
• The importance of quality financial information in validating debt capacity estimates.
• The range of corrective measures available to both borrower and lender should a borrower's debt capacity fail to support outstanding, or proposed, interest-bearing debt.

If you would like more information about any of our other 26 single-topic Webinars or about our six Credit College Courses, please call us at 1-866-237-7228 or send us an email at inquiry@shockproof.com.

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