New research shows corporate earnings calls offer insight on the labor market:
Source: Federal Reserve Bank of St. Louis
- The use of certain terms in these calls, such as “labor shortage” and “labor costs,” appears to be highly correlated with U.S. labor market tightness.
- Chatter about labor issues and automation are significantly related as well: Firms that report labor issues are 45% more likely than the average firm to also report increased investment in automation technologies.
Photo: Courtesy Walmart (Screenshot of Walmart 2023 Annual Report)
June 18, 2024
By Mick Dueholm , Aakash Kalyani , Serdar Ozkan
Labor market tightness is a key labor issue that firms face and an important consideration in monetary policy decisions. Economists typically measure tightness as the ratio of job vacancies to unemployed workers.1 However, this measure of labor market tightness can only be disaggregated by industry, region and broad sizes of establishments. In this blog post, we employ a novel, textual analysis of corporate earnings calls to obtain a measure of labor issues that each publicly traded firm faces.2
Textual Analysis of Earnings Calls
Earnings calls are quarterly meetings where executives of publicly traded companies discuss the financials of their firms and factors that may impact current and future performance, as well as answer questions from stock analysts and institutional investors on information not contained in their earnings press release or other regulatory filings. As such, they are a useful source of data on firms discussing hiring challenges, union disputes, new innovations or outsourcing. For this analysis, we parsed the transcripts of 171,208 earnings calls from 6,456 U.S. firms between the first quarter of 2002 and the first quarter of 2024. The text, supplied by S&P Global, amounts to 60 gigabytes of data. Recent studies have used textual analysis of earnings conference calls to develop measures of firm-level concerns related to political risk, climate risk, and epidemic risk and sentiment.
In this blog post, we describe the construction of our measure of labor issues faced by firms. We built our measure by first identifying keywords, such as “labor shortage” and “labor costs.” These keywords, which we call “seed keywords,” could plausibly appear in text when firms are discussing labor issues. We then used a natural language processing model that identified other phrases with similar meanings—such as “wage pressures” or “salary inflation”—based on their context to the seed keywords.
To validate that these keywords indeed identify discussion of labor-related issues, we performed a human audit by reading examples of individual excerpts that make use of each phrase to confirm that they corresponded to actual talk of labor issues in the context of the transcript. We then constructed our labor issues measure by counting the frequency of the keywords and then dividing by the length of the transcript. While more aggregate data on hiring, quits or job vacancies can show labor issues at the industry or regional level, these transcript data are unique in that they allow us to explore firm-level labor issues.
The table below shows the keywords we identified, along with the number of earnings calls they appeared in and a sample excerpt demonstrating the context surrounding these keywords. Generally speaking, firms discussed difficulties finding workers and the need to pay existing workers more. Frequently, these mentions of labor issues appeared when firms discussed lower profitability or used the issues as a rationale for increasing prices. Some cited higher wages, while others discussed industry or even economywide issues.
Notably, the vast majority of excerpts in the data contained negative sentiment. As a result, we can interpret an increase in mentions of labor issues as a situation in which firms are facing more labor issues, rather than resolving existing ones.
| Ranking | Keyword | Times Mentioned in Earnings Calls | Sample Excerpts |
|---|---|---|---|
| 1 | Labor costs | 22,911 | “… looks like shipping costs and maybe labor costs might see some inflation …” |
| 2 | Labor cost | 15,974 | “… the increase in labor cost was, is primarily due to higher …” |
| 3 | Personnel costs | 13,625 | “… by the company’s store remodeling program, which resulted in higher personnel costs …” |
| 4 | Wage inflation | 13,597 | “… kind of environment, especially given the higher pension cost and wage inflation …” |
| 5 | Labor shortages | 4,684 | “… we’ve got additional pressure from labor shortages, energy issues that are all moving our product costs …” |
| 6 | Labor inflation | 3,056 | “…That’s predominantly personnel expense, we have a few things, ongoing labor inflation …” |
| 7 | Labor shortage | 2,144 | “…we struggled mightily with the labor shortage that came out of that effort…” |
| 8 | Labor issues | 2,107 | “… this is mainly due in part to labor issues and limited number of available welders with experience …” |
| 9 | Wage pressure | 2,068 | “… are you seeing overall wage pressure in the fulfillment centers …” |
| 10 | Labor expense | 1,401 | “… these unforeseen technical issues and increased labor expense drove the cost to approximately …” |
| 11 | Labor challenges | 1,338 | “… last year the industry faced significant weather and labor challenges. We faced similar challenges this year …” |
| 12 | Salary inflation | 1,296 | “… part is due to new acquisitions and partially due to salary inflation …” |
| 13 | Wage pressures | 1,241 | “… yes, absolutely, in certain areas that we operate, the wage pressures are increasing …” |
| 14 | Labor pressures | 630 | “… I think there is no question that the labor pressures and labor cost pressures have been greater …” |
| 15 | Labor pressure | 494 | “… we’re going to continue to see some labor pressure. The good news is once our franchisees get their …” |
| 16 | Labor tightness | 194 | “… we are beginning to see some signs of labor tightness affecting staffing availability across the industry, including our own …” |
| SOURCES: S&P Global and authors’ calculations. | |||
| NOTE: Data are from the first quarter of 2002 to the first quarter of 2024. | |||
Mentions of Labor Issues in Earnings Calls and Labor Market Tightness
While we have shown that our measure does actually capture firms discussing labor issues, another question is whether these discussions correlate with aggregate labor market tightness, as measured by the job openings-to-unemployed ratio. When this ratio exceeds 1, it means the number of workers that firms are trying to hire exceeds the number of workers without jobs.
The figure below compares aggregate labor market tightness with our measure of labor issues. For ease of interpretation, we normalize our index of labor issues to have an average of 1 in the pre-COVID-19 pandemic period between 2002 and 2019.3
U.S. Labor Market Tightness and Labor Issues Index
SOURCES: U.S. Bureau of Labor Statistics, S&P Global and authors’ calculations.
NOTES: Labor market tightness is measured using the ratio of U.S. job postings to unemployed workers. The labor issues measure, which counts the frequency of keywords in earnings calls and then divides them by the length of the transcript, has been normalized to average 1 between 2002 and 2019. Data begins with the first quarter of 2002 and goes to the fourth quarter of 2023 for labor market tightness and to the first quarter of 2024 for the labor issues measure. Shaded areas indicate a recession.
Over the entire period we examined, the correlation between the labor issues index from earnings calls and labor market tightness is quite high at 0.838. Both measures saw a decrease during the 2007-09 recession, and then an even sharper decline at the start of the pandemic due to shutdowns and decreased labor demand. Intuitively, this makes sense, since firms that are unable to be open or lack the necessary supplies are unlikely to need to hire new workers or pay existing workers more.
This decline was followed by a spike starting in late 2021 as employers struggled to keep up with high demand because of the economic reopening and stimulus payments to households. As many workers continued to stay home during the pandemic and firms faced strong demand for their products and services, employers found it difficult to hire enough workers and had to offer raises and bonuses to existing employees.
In the case of labor market tightness, the measure peaked in the second quarter of 2022 at 1.9, meaning that for each unemployed worker there were about two job vacancies. In the case of the labor issues index, its peak in the fourth quarter of 2021 represented a fivefold increase in mentions of labor issues relative to the pre-pandemic period. Consequently, our measure of labor issues seems to accurately track aggregate labor market tightness.
In conclusion, we constructed a novel, firm-level measure of labor issues from earnings calls and then showed that it closely tracked a measure of aggregate labor market tightness. Intuitively, firms more frequently discuss increasing wage costs, labor shortages and hiring difficulties when the labor market is tight, as was the case in the years following the start of the pandemic.
The key advantage of our methodology is that we can link this quarterly, firm-level measure of labor issues to the firms’ own employment and investment decisions—data available from Compustat—to investigate how they deal labor issues, such as those arising from a tight labor market. In our next blog post, we discuss whether a tight labor market prompts firms to automate some tasks, thereby reducing their future demand for labor.
Notes
- Data on the number of job vacancies are from the monthly Job Openings and Labor Turnover Survey conducted by the U.S. Bureau of Labor Statistics. Data on the number of unemployed workers are from the Current Population Survey, which is conducted by the U.S. Census Bureau for the Bureau of Labor Statistics.
- The authors plan to publish a forthcoming St. Louis Fed working paper on this research.
- We also chose to ignore firms from industries such as finance and real estate, where labor and hiring dynamics are substantially different from those in other industries.
About the Authors
Mick Dueholm
Mick Dueholm is a research associate with the Federal Reserve Bank of St. Louis.
Aakash Kalyani
Aakash Kalyani is an economist at the Federal Reserve Bank of St. Louis. He joined the St. Louis Fed in 2023. Read more about the author and his research.
Serdar Ozkan
Serdar Ozkan is an economic policy advisor at the Federal Reserve Bank of St. Louis. Read more about the author and his research.
