To understand the potential impact of labour shortages on modern economies, a useful starting point is the period 1346-1351 when the Black Death struck England. Handily the Bank of England has collected a millennium of economic data and they reveal that during the worst five years of the plague, almost half of the UK population was killed. It was the largest reduction in the supply of labour in the last 1,000 years.
In an agricultural economy, the high death rate gave remaining agricultural workers a lot more bargaining power and resulted in a sharp increase in their wages. However, many crops were lost due the inability to harvest them in time. In fact, bushels of wheat farmed per acre fell 33 per cent in 1346 and this shortage caused the price to jump immediately.
Covid-19 hasn’t been nearly as deadly as the Black Death. Adjusted for population size, the medieval plague killed 263 times more people than our most recent pandemic. Despite these disparities, there are some clear similarities in the fallout we are currently seeing in the economy. Data from the ONS shows job vacancies in the UK rising above 1m for the first time on record, while both wages and inflation are increasing. In the US, 51 per cent of small companies say they have vacancies they are unable to fill.
Between 1346 and 1351, the population dropped by 45 per cent from 4.75m to 2.60m. During the same period, the average farm labourer’s wages more than doubled, increasing by 117 per cent. This spike in wage inflation coupled with the lost crops meant that the cost of buying “a respectable basket of necessities” subsequently rose by 57 per cent.
The current pandemic hasn’t killed off the working age population in the same way, but it has resulted in a significant reduction in the supply of labour. The reason is likely some combination of Brexit, furlough and a general resetting of people’s attitude towards work.
After the Black Death, at first landlords were easily able to pass on the rising cost of labour through increased wheat costs. For the landowners, issues arrived in 1376 when a bumper harvest (double the amount was produced) drove down the price of wheat. Labourers were unwilling to take pay cuts from the high wages they were given after the plague which meant that landowners' margins dropped significantly.
Lessons for today
What does this mean for us now? We are already going through the initial phase of a sudden reduction in low-cost labour. McDonalds is seeing 10 per cent wage inflation for the year-to-date and in its restaurants wages are up over 15 per cent. So far it has been able to offset this with a 6 per cent increase in prices.
But if there is a large reduction in the price of wheat and energy due to a technological breakthrough or adverse weather in the coming years, then the price of food could fall dramatically. This would be bad news for McDonalds and other restaurants because they are much more labour intensive than supermarkets.
If the cost of food fell far enough, in comparison to labour, then consumers would begin to eat at home more regularly. And as we discovered after the Black Death, it would then be tricky for McDonalds to bring down salaries to compete.
Higher wages for unskilled work do look set to stay. So, investors should heed this risk in labour-intensive industries. History rarely repeats itself perfectly, but if it does, a drop in commodity prices could be bad news.