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The Kings of Staten Island

April 18th, 2022

Quarterly Commentary

Pete Davidson may be the silver screen’s King of Staten Island, but for U.S. workers that honorific is shared by two friends, Derrick Palmer and Christian Smalls, who did the unimaginable: take on Amazon and win. They are behind the first labor union at Amazon, organizing for better working conditions and benefits.  Is this a one-off win for labor, or a sign of empowerment for low-wage earners in the U.S.?

For years, low-wage earners in the U.S. had limited negotiating power. A steady supply of labor kept grievances in check; speaking out could result in workers being summarily fired.  Recent labor statistics show this power may be shifting. With stats of 11 million non-farm job openings and 0.6 unemployed persons per job opening, labor supply is pretty tight, at levels not seen in decades. Combined with broad-based inflation eroding purchasing power, particularly for low-wage earners, these factors enable a dynamic that corporate America has not experienced in recent memory.  While many questions arise that will spark intense debates, we believe we are entering a new era that will see higher wages and benefits for lower earners.

An increase in wages should lead to higher personal income which is a good thing for both borrowers and credit investors. One of the most important credit metrics we look at when assessing an investment is a borrower’s “debt to income” ratio, commonly referred to as DTI.  The numerator considers the borrower’s obligations (e.g., mortgage, rent obligation, credit card debt), and the denominator reflects the borrower’s earnings less expenses, in nominal dollars.  A lower DTI is more favorable.

Typically, prospective borrowers with high DTI either don’t have access to credit, or if they do, they are deemed riskier and priced accordingly.  What options exist to improve DTI?  Prospective borrowers can either lower the numerator (debt) or increase the denominator (income).  For lower-income borrowers, many of whom are locked out of access to affordable credit, higher wages are the most direct path to a lower DTI.  Could organized labor and collective bargaining hold the key to unlocking access to affordable, non-predatory credit?

If that is the case, Mr. Palmer and Mr. Smalls will indeed merit their crown.

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