Labor: A critical component of supply chains under growing pressure
Labor to support supply chains is coming under growing pressure from climate change, public health, corporate responsibility and other factors.
Published: February 21, 2024
By Peter Tirschwell, Bruce Thomson, and Yacine Rouimi
Highlights
Labor is a critical supply chain input facing mounting pressure from multiple fronts, including climate change, demographics, public health and corporate responsibility. These factors will have far-reaching impacts on supply chains in the coming years.
The COVID-19 pandemic brought to light growing labor shortages in industrialized countries, revealing challenging demographic trends that cannot be easily reversed, partly due to political restraints on immigration in developed markets.
Climate change is a major factor in this equation; worker productivity has been shown to decline when temperatures exceed certain levels.
There is a growing demand for companies to monitor and manage labor risks in their end-to-end supply chains. In recent years, there has been a marked rise in mandatory due diligence regulations to protect and respect worker rights across the value chain.
It is not an overstatement to say that, due to increasing labor pressures, supply chains will experience higher costs and be more prone to disruption in the coming years. However, amid these challenges, there are also opportunities for workers and firms that can best anticipate and adapt to the changing dynamics.
Supply chains involve the physical production and movement of goods and mostly rely on human labor. But a handful of factors, including climate change, public health and worker demographic trends, can have a serious impact on the labor supply and thus cause disruption in supply chains. Developed and developing markets are moving in opposite demographic directions, with developed economies facing an aging population and labor shortages while much of the developing world is experiencing population growth.
Labor and supply chains are interdependent, with growing pressures
Labor remains an essential component of supply chains amid the rise of technological advances such as 3D printing, robotic warehouses and automated vessels.
Acute labor shortages were widely reported during the COVID-19 pandemic, particularly in the healthcare, food service and hospitality industries. In late 2021 and early 2022, the US saw a 20-year high in quit rates — a measure of voluntary turnover tracked by the Federal Reserve — as businesses struggled to hire and retain workers to meet demand. (See chart, "US worker quit rates have come down off their recent peaks") By the end of 2022, the Federal Reserve Bank of Atlanta reported that the quality and availability of labor was the top concern amongst senior corporate executives.
Some of the supply chain disruptions that occurred from 2020 through 2022 can be traced back to labor shortages in factories and freight transport.
Looking forward, worker demographic trends stand out as a major global theme in labor's impact on supply chains. The aging population is causing workforce declines in the developed world, including China, while much of the developing world is experiencing simultaneous workforce growth. This presents a growing disparity with wide-ranging implications on politics, economics and trade.
Demographic trends could disadvantage industrialized market supply chains
According to research from the Center for Global Development, Organisation for Economic Co-operation and Development, countries will lose an estimated 92 million working-age people and gain over 100 million elderly people by 2050. Without migration, the 38 countries of the OECD, representing over 40% of global GDP, will require an additional 15 million workers per year beyond the number that can be expected from native growth to meet the needs of their basic social infrastructure, such as retirement and healthcare programs. Long-term systemic supply chain impacts of labor shortages are expected to be seen in the US as early as 2028 when new domestic workers in the economy will be insufficient to meet the needs not only of elderly and childcare services but also healthcare, construction, cleaning and maintenance, and food preparation and service.
At the same time, the trend in emerging regions is the opposite. According to the Center for Global Development estimates, sub-Saharan Africa, South Asia, Southeast Asia, Latin America and the Middle East could see a combined net increase of 1.4 billion working-age individuals between 2015 and 2050, leading to a potential surplus of 590 million workers by 2050. As such, though a practical solution may be greater cross-border labor mobility, this sets up a fundamental conundrum in which worker shortages that could be mitigated by immigration may be held back by politics in developed economies, limiting policy options to encourage labor mobility to fill gaps. The emerging world will also likely face challenges, including support of domestic needs.
While demographic imbalances are likely to be most acutely pronounced in labor-intensive, non-tradeable services sectors, the effects on manufacturing and global supply chains are more ambiguous. The workforce growth disparity between developed and developing economies could bode well for global trade, given the long-term availability of labor for manufacturing in markets outside those that consume the manufactured goods.
Climate change will increasingly impact labor productivity
Climate change is another major factor shaping labor and supply chains, with its impact likely to grow over time. Studies have shown that worker productivity declines when temperatures exceed certain levels. Such a drop in productivity occurred in the manufacturing and transport sectors during the height of COVID-19, resulting in port bottlenecks, inventory dislocations and lost revenues. Climate-related productivity impacts are likely to have similar disruptive effects, potentially including increased migration and social unrest.
Temperatures and work duration are generally uncorrelated, except after a temperature threshold is crossed (between 81.0 degrees F and 83.5 degrees F, depending on the industry). Beyond this threshold, as observed in the US, a gradual reduction in the average work week can be observed in industries such as manufacturing (7.4 minutes lost per week per worker for each additional Fahrenheit degree), leisure/hospitality (4.1 minutes) and construction (4.0 minutes). The thresholds are likely different in other countries.
In July 2023, temperatures exceeded these thresholds in some US states. S&P Global Market Intelligence research suggests a total loss of over 13.5 million work hours in the US private sector, primarily in Texas and Arizona in the leisure/hospitality, construction and transport services segments. While these losses may have a negligible impact on overall US GDP (accounting for a mere 0.1 percentage point of annualized quarter-over-quarter growth in the third quarter), prolonged high temperatures could manifest in a nonlinear manner going forward. As sectors such as construction and transport services — vital to US supply chains — experience losses of labor input, it could lead to operational challenges in downstream industries reliant on these services and potentially increase economic damage.
Expanding corporate social responsibility mandates focus on labor
Labor imbalances and climate concerns affecting worker productivity give rise to a third major theme: rising demand for companies to monitor and manage labor risks in their operations and supply chains. In recent years, S&P Global has noted a marked increase in the quantity of mandatory due diligence regulations, which govern corporate responsibility to protect and respect worker rights across the value chain. Voluntary guidelines are becoming legal requirements, covering more companies and issues, and carrying tougher enforcement mechanisms. (See chart, "Rise in number of mandatory due diligence laws since 2010, by region")
Of note, the EU Corporate Sustainability Due Diligence Directive, approved by the European Parliament in 2023, would apply common supply chain due diligence requirements for companies based or operating in all 27 EU member states. Though not yet finalized, the directive is estimated to cover approximately 12,800 European companies and 4,000 non-European companies. In the US, the 2021 Uyghur Forced Labor Prevention Act is being used, alongside US Customs and Border Protection-issued withhold release orders, to deny shipments' entry into the US unless importers can convincingly document steps taken to ensure the goods were not manufactured in whole or in part using forced labor. Since mid-2022, shipments valued at over $2 billion have been targeted at ports of entry, principally affecting electronics, industrial materials, textile and apparel, and agriculture.
As more due diligence requirements become law, it is evident that transport worker rights are within the scope of compliance expected of companies for worker welfare. It is the responsibility of transport companies and the brands or cargo owners who use those services to ensure worker rights protections. This may lead to more frequent audits based on references such as the Maritime Labor Convention.
Companies will come under pressure to invest in systems, workflows and people to ensure compliance with new legal requirements. They may also look to adapt their business, operating or sourcing models to manage risk and limit legal exposure. For instance, brands may choose to streamline their sourcing model, reducing the number of suppliers to larger, potentially more expensive ones, or change sourcing geographies. Others may update their production timelines or inventory practices to avoid introducing risk.
Due to growing labor pressures, supply chains are expected to face higher costs and become more prone to disruption in the coming years. This creates an opportunity for workers and firms that are best able to anticipate and adapt to the changing dynamics.
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This article was authored by a cross-section of representatives from S&P Global and in certain circumstances external guest authors. The views expressed are those of the authors and do not necessarily reflect the views or positions of any entities they represent and are not necessarily reflected in the products and services those entities offer. This research is a publication of S&P Global and does not comment on current or future credit ratings or credit rating methodologies.
