Welcome, everybody, and thank you very much indeed for joining us for another thought leadership debate. My name is Kilian Niemarkt, Client Portfolio Manager at the RBC Global Equity team and I'm joined today by Jeremy Richardson, Senior Portfolio Manager. Welcome, Jeremy.

Let's begin.

The topic that we would like to discuss today is around one of the most important contingent assets a company enjoys; human capital. The reason for that is, and this at least is my observation but I'm really intrigued to get your observation on that topic as well, when speaking to management teams and chief executives these days, there's one term that I hear over and over again which is the Great Resignation.

Looking at the official data provided by the US statistics is that 47 million Americans last year in 2021 voluntarily left the workforce or quit their jobs, which accounts essentially for one-third of the total non-farm workforce. This obviously sounds like a mass exodus of the workforce and I'm actually really interested to get your view, Jeremy, because you're a consumer specialist covering this sector for over 20 years. Are you seeing similar trends in your sector as well?

Yes, absolutely. It's a key topic and it's been a very profound shift in the labour market. I think we need to just stop and acknowledge the impact that the pandemic has had on the labour market. We've seen different policy responses from different parts of the world. One of the interesting differences, in particular, is that the European approach appear to be to try and protect livelihoods, and it did that by providing payments essentially from the public purse to companies in order to protect companies in terms of the profitability so they didn't have to make the workforce unemployed.

In the US, however, the approach was different. Those payments were still made but they were made to the individual in the event of eventual unemployment. There was less barrier to some extent in terms of company shedding labour in the US compared to Europe. We have seen some geographical differences but, nevertheless, the topic seems to be equally apparent across, talking to companies.

In fact, there has been a realisation now coming out of the pandemic that generally labour markets are tight and I think that's being reflected in the macroeconomic data that we are seeing from most of the major economies. That's being played back to us in some of the comments that company managements are saying in terms of the difficulty in recruiting and retaining labour given this changing led market landscape. The 47 million, nevertheless, is a heck of a lot of people, right?

It is indeed.

What's your reading of where all those people have gone?

That's a really interesting question because when you dig deeper into the actual underlying data, one can observe that it’s essentially just a continuation of a trend that began over a decade ago after the great financial crisis. For instance, if I would apply a linear forecast starting in September 2009 (which marks the first quarter of economic expansion after the great financial crisis) and towards February 2020, (which is the first months before the global pandemic hit us), we can see that is a continuation of the 11 basis points increase in resignation rates where we are today.

In fact, it is just a normalisation because when the pandemic hit, resignation rates were down 46%, and that is very obvious because of economic uncertainty. Then towards the beginning of 2021 when optimism recovered and we saw that in the market as well with the reopening trade, that we discussed a lot during the recent quarters, one would actually see that this optimism has driven and given people confidence to quit their jobs and also to retire because as the prices in the financial markets were at an all-time high, we saw double-digit returns in equity markets in 2020 and 2021, 20% S&P gross. It was a very good opportunity to retire and to leave the labour market. This is certainly driving it, but essentially, it's just a continuation of a trend.

We can maybe say then that the pandemic really sort of froze the labour market?

Yes.

And stopped people from engaging in changing employment because of concern that the change might mean that they could be moving to something worse or, alternatively, the jobs that first in first out they might end up with high levels of uncertainty. When those concerns dissipated as the result of the pandemic easing, this led to now where there's more rotation within the labour market.

I think one of the interesting things that we've heard talking to experts and company management teams on this particular topic is just the stratification within the labour market. How this phenomenon is playing out within different groups in a different kind of way. I was really struck by a comment that one industry leader said that, actually, the pandemic had different effects on different groups based upon whether or not you worked in a service industry, where being told you could work from home was very liberating, it gave people freedom and they really appreciated that.

In fact, for some now, the return to premises, the return to the office is, in some ways, taking away some of that freedom, and there's a degree of reticence for that. We hear that from employment consultants who are saying that those firms who continue to offer that degree of freedom are having more success in actually recruiting and retaining labour.

On the other hand, individuals who work in key roles, the key workers, found that with the pandemic they were denied freedom. There were certain ways of working that had to be followed and they had to be there because of the nature of their work. That differential has created stresses within the labour market, and those stresses arguably are, I would suggest, that perhaps were contributing to this period of rotation now that we're in this element at this period of catch-up.

This is essentially also what is confirmed by the actual data, because if you look at the resignation rates by sector, for instance, the precisely the sectors you just touched on with the highest quit rates, for instance, hospitality, critical care, retail trade, non-durable good manufacturing, those all tend to have lower wages as well and also have the highest quit rates.

On the other hand, we saw that in the workforce potentially higher-paying industries like business services, professional services actually increased. I almost think about it as instead of phrasing it the Great Resignation, more as a great reshuffle, from lower-paying industries towards higher-paying industries. This also leads toward a new boldness of employees. It gives them bargaining power given that unemployment rate as historic lows in the UK as well as in the US.

That brings us onto a much more topical conversation about labour relations, which we've seen played out in the press at the moment. I also wonder, Kilian, whether actually, it's not just about wages and about the compensation for time, but also about the quality or the nature of work that people are responding to. It seems that those companies and those industries that are able to offer more fulfilling roles having more success at recruiting and retaining labour than those who are perhaps relying upon perhaps more old-fashioned ways of working who haven't been prepared to invest.

I think that probably speaks to what you're saying at the beginning point about how workforces, how labour, how human capital is a really important stakeholder group, a really important intangible asset of many companies. You won't often see it actually reflected in companies' financial statements, but as investors, it's a really important component for us to pay attention to.

Absolutely. Ultimately, we are talking about purpose, I think. Also, for the employees choosing work and especially if I think, for instance, about the generation that which will account for 30% of the workforce in 2030. It will be increasingly difficult for employers to attract and retain talent from this generation because the demands, and you touched on this old-fashioned thinking about employment and retention. I think companies, great businesses will need to rethink, and I'm confident they will find measures in order to attract and retain talent.

Especially if I think of technology companies, they're competing for top talent in the sectors. It'll be really fascinating to watch, and certainly also, a lot of our engagement activities will be around this topic going forward.

Thank you very much indeed for joining us. I hope this was of interest for you, and we look very much forward in catching up with you again soon. Thank you very much, Jeremy.