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Weekly Thoughts: Get Low

Here is something that caught our eye this week:

Get Low

There have been many articles in the news recently covering the implications of historically low unemployment rates, which are nationally projected to fall below 4% this summer.  Since one popular Bloomberg article showcased the impact of low unemployment in our hometown, Portland, Maine, we thought it appropriate to reflect on the situation at hand.  To provide some context, Portland has a population of roughly 67,000 and an unemployment rate of 1.8%, while Maine as a whole has an unemployment rate of 2.9%, the lowest since 1976.  Shawty got low, indeed.

On the surface, everybody seems to love a low unemployment rate, but our Econ-101 professors would be proud of us for remembering that these things can be a double-edged sword.  On the plus side, low rates can be a sign of a thriving economy, which is generally good for business.  A tight job market also provides more opportunity for employees and potential for increasing wages as employers compete for scarce talent.

However, a low unemployment rate can also be more reflective of labor force declines than economic productivity, a factor of particular concern in Maine, where there is stagnant population growth combined with the highest median age in the country (44).  Regardless of the root cause, extremely low unemployment rates can inhibit growth if companies are unable to find qualified people to fill open spots.  Increasing wages can help solve that problem, but if those costs are not passed on to the consumer it can hurt profitability, which in turn, hurts the ability to invest back in the business.  Those same Econ-101 professors from before will argue that in the long run, these sorts of things even out as increased price (wages) leads to new entrants in the market, but reality does not match supply-demand theory as smoothly as the graphs in our textbooks would lead us to believe.

We’d say we are currently riding the line between the good and bad aspects of low unemployment but can see the writing on the wall that recruiting, developing, and retaining talent is increasingly becoming the critical inhibitor of growth at our companies, both in and out of state.  That said, as entrepreneurs, we don’t spend much time dwelling on the situation at hand.  Unless one of us becomes Chair of the Fed sometime soon, no amount of complaining about the labor market will help our companies hit their goals.  Luckily, we believe that constraints bring creativity and that winners adapt to their new reality.

While perhaps not as quickly as some would like, that is exactly what is happening: companies are figuring out how to set up more effective recruiting practices, improve processes to do more work with fewer people, and investing more in their workforce.  For instance, The Portland Press Herald explains how the local police department is adapting:

“Employers are going to have to be more open-minded when they fill jobs. The recent announcement that the Portland Police Department would consider applicants who are not U.S. citizens, or who have smoked marijuana, is an example of that. The department has found that good applicants are too hard to find, and it must be willing to talk with people who would have been peremptorily rejected in the past. Other employers may also have to adjust to reality.”

While, broadly speaking, we are believers that the market adapts to such environments, we do observe some additional constraints on small businesses versus their larger brethren when dealing with the difficulty of low unemployment.  For instance, most small businesses do not have the resources to devote towards developing traditional human resource practices (i.e., formal recruiting, onboarding, training, learning & development programming, etc.) which means they can be at a disadvantage to those who already have such things in place.  Their size, and the size of their talent needs, also makes it hard to justify investing in full-time HR support, despite the fact it is their biggest problem.  This creates a chicken-or-egg-esque conundrum with ROI on one side and resource scarcity on the other.

Fortunately for Chenmark, these are exactly the types of issues we have constructed our business model to address, as we can introduce aspects of larger company practices across our portfolio of small businesses.  While a tight labor market is always difficult to navigate, we think the nimbleness of small business, combined with creative leadership and some access to resources of scale, will allow us to manage through this low, low, low, environment, whether or not we got them Apple Bottom jeans, boots with the fur, or otherwise.

Have a great week,

Your Chenmark Capital Team

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