Does Worker Scarcity Spur Investment, Automation and Productivity? Evidence from Earnings Calls

Following the COVID-19 recession, the U.S. experienced a historically tight labor market. For example, the number of job vacancies per unemployed worker was about 2 in early 2022. This ratio has since fallen somewhat, to 1.3 in April 2024. When the supply of available workers is limited, either due to low unemployment rates or shortages of specific skills, the cost of labor goes up as employers raise wages to attract and retain workers.

The FRED chart below shows that this was the case after the COVID-19 recession, as increases in the employment cost index more than doubled from 2.7% in the third quarter of 2020 to 5.6% in the second quarter of 2022.The employment cost index measures the hourly labor cost of employees to employers, including wages or salary and benefits. In this environment, do firms substitute away from the more expensive input, labor, toward the cheaper one, capital? For instance, a grocery store might substitute cashiers with self-checkout kiosks, or a logistics company might incorporate self-driving trucks to move goods. Can automation be a solution—albeit a partial one—to labor shortages and therefore help boost supply and reduce inflation?

In a previous blog post, we explained how we used a textual analysis of earnings calls to construct a novel, firm-level measure of labor issues—such as wage costs, labor shortages and hiring challenges. We found that our quarterly measure of labor issues at U.S. firms closely tracks aggregate labor market tightness.Our quarterly, firm-level measure of labor issues uses an analysis of transcripts from 71,208 earnings calls from 6,456 U.S. firms between the first quarter of 2002 and the first quarter of 2024. We normalized this labor issues measure to average 1 between 2002 and 2019. See our June 18, 2024, blog post, “Can Earnings Calls Be Used to Gauge Labor Market Tightness?” For example, our index increases to about 5 in the fourth quarter of 2021 from a prepandemic average of 1.

In this blog post, we discuss whether the tight labor market in the years following the COVID-19 recession might have prompted firms to increase their investment and automate some tasks. To determine this, we used Compustat data to link our measure of labor issues at a firm level to the investment decisions and productivity growth of publicly traded U.S. companies.We plan to publish a forthcoming St. Louis Fed working paper on this research.

Labor Issues Result in Increased Investment

To determine whether firms in our dataset actually increase their investment because of labor issues, we employed an econometric analysis that studies firm-level investment and exploits differences in labor issues faced by a firm at different points in time. We found that a 1-unit increase in a firm’s labor issues leads to a 28 basis point increase in its investment. To put this investment effect into perspective, our estimate implies that since 2021, the increase in labor issues (due to, for example, tighter labor markets) has spurred approximately an additional $55 billion in investment in the U.S. economy.

This is a significant amount, and one that’s similar in size to funding appropriated through the 2022 CHIPS and Science Act for boosting domestic semiconductor research and manufacturing. We also found that the increase in investment has been driven by firms in industries that heavily employ routine manual tasks, such as assembly line work in the manufacturing industry or packaging and labeling in the warehousing sector. Industries that don’t heavily employ routine manual tasks tend not to experience a significant increase in investment resulting from labor issues.

Labor Issues Are Associated with Mentions of Automation

Discussions of labor issues and automation often coincide in earnings calls. For example, in a first quarter 2024 earnings call, an executive at an automotive technology company said: “Our focus this year is on accelerating automation to address wage inflation and improve efficiencies in our plants.” This excerpt clearly demonstrates the phenomenon of firms turning to automation as a way to reduce labor costs.

To investigate this relationship, we counted instances in which automation was mentioned in earnings calls.Like our measure of labor issues, our automation measure is quarterly, at the firm level and uses a textual analysis of transcripts from the same dataset of earnings calls. We found that chatter about labor issues and mentions of automation were significantly associated. More specifically, firms that discuss labor issues are 45% more likely to talk about automation in earnings calls compared with the average firm in our sample. As with investment, labor issues and mentions of automation are more likely to coincide in industries with a higher share of routine manual tasks, which are easier to automate. This supports our initial conjecture that tight labor markets lead firms to adopt automation technologies.

Labor Issues May Lead to Higher Productivity

If firms increasingly turn to automation in response to labor shortages, we should expect to see improvements in labor productivity. We measured labor productivity for each firm in our dataset as revenue per worker and adjusted for inflation. We then conducted an econometric analysis similar to the ones we performed for investment and automation.

Firms within industries that heavily employ routine manual tasks—about one-sixth of our sample—and that mention labor issues in earnings calls see an increase in labor productivity. More specifically, we found that a 1-unit increase in labor issues is associated with an 8.9 basis point increase in productivity growth after four quarters. Notably, the effect of a tight labor market on productivity is negative for firms relying on nonroutine tasks. Since these firms cannot easily substitute labor with capital, their productivity growth is more hampered by the labor issues they face.

Automation, Productivity Growth and Inflationary Pressures

Our novel, firm-level measures of labor issues and automation, combined with data from publicly traded companies, suggest that a historically tight labor market has prompted firms to adopt automation technologies to address labor shortages. This effect appears to be particularly strong in industries with high shares of routine manual tasks. First, we found that labor issues lead to large increases in investment. Similarly, firms that mention labor issues in their earnings calls are also more likely to mention automation. Finally, labor issues result in productivity gains for some firms as they increase their investment in automation and adopt new innovations.

We conclude that while a tight labor market leads to inflationary pressures in the short term, stronger productivity growth can expand production capacity, thereby softening price pressures in the long run.

Notes

1. The employment cost index measures the hourly labor cost of employees to employers, including wages or salary and benefits.
2. Our quarterly, firm-level measure of labor issues uses an analysis of transcripts from 71,208 earnings calls from 6,456 U.S. firms between the first quarter of 2002 and the first quarter of 2024. We normalized this labor issues measure to average 1 between 2002 and 2019. See our June 18, 2024, blog post, “Can Earnings Calls Be Used to Gauge Labor Market Tightness?”
3. We plan to publish a forthcoming St. Louis Fed working paper on this research.
4. Like our measure of labor issues, our automation measure is quarterly, at the firm level and uses a textual analysis of transcripts from the same dataset of earnings calls.