Productivity is a measure of performance that compares the output of a product with the input, or resources required to produce it. Economists see productivity as the key source of economic growth. A country’s ability to improve its standard of living depends on its ability to raise its output per worker. This does not mean that every worker works harder. It means that some combination of improvements in equipment, the production process and the work environment enables workers overall to increase their production. The US has been exceptionally adept at capitalizing on this, and, together with a history of innovation, the US, with approximately 5% of the world’s population, currently accounts for some 25% of the world’s GDP.
Automation describes a wide range of technologies that reduce human intervention in processes. A common misconception is that the primary purpose of automation is to lower costs by replacing workers with machines. In reality, automation is also (primarily?) used to increase capacity and support growth within a given footprint. It is interesting to note that after decades of growth in the use of automation, the US has a labor shortage.
Investors may want to consider the implications of a major work stoppage by East and Gulf Coast dock workers. While a wage agreement has already been reached, union leadership has taken the position that they want “absolute, airtight language that there will be no automation or semi-automation.” The 62% wage increase can probably be managed, but an inability to implement efficiency gains could place the industry at a competitive disadvantage that could lead to reduced profits and job losses over time.
More important, US ports are already capacity constrained in some markets and construction of new ports or an expansion of existing locations is, at best, a long process. If the US is going to continue to benefit from the growing worldwide economic activity, increasing capacity at existing ports is probably the most practical solution.
Investors seeking to handicap the possible outcome of negotiations scheduled to begin in January may want to consider several potential areas for comprise. The industry is in good financial shape and can probably absorb the negotiated wage increases and provide for financial protection for any near-term, and probably short-term, reduction in head count, if they can reach a compromise on automation. Perhaps the elephant in the room may be the fact that robots don’t pay dues.
All comments and suggestions are welcome.
Walter J. Kirchberger CFA
