Basic Supply and Demand
By Arnold Kling
Reading this story about unemployment among computer programmers left me feeling amused and vindicated.
“This is the worst I’ve seen,” said … an out-of-work systems integration analyst, who has been involved in the tech industry since 1974. “I’m running into people who have been out of work a year or a year and a half. It’s definitely an employer’s market out there.”
I feel vindicated, because the second online economics essay that I wrote, in December of 1997, said that the Commerce Department was wrong to forecast a persistent “shortage” of technical workers.
Now we are ready to pose the question for our first-year economics students: describe the new equilibrium in an economy in which the supply of labor falls and the supply of capital increases.
The answer, of course, is that the wage rate increases and the rate of return on capital declines. At higher wages, people will supply more labor (although perhaps not much more), and firms will demand less labor. With these market mechanisms working, there will not be any shortage.
Fortunately, a foolish prediction of a 20-year labor shortage probably will not cause the staffing industry to make any mistakes over its relevant time horizon, which probably is closer to 20 days. More ominous are the rumblings from the Department of Commerce, which recently published a study purportedly showing that the U.S. faces a future scarcity of skilled labor.
The prediction of a skilled labor shortage gives one the feeling that we are being softened up for some foolish policy initiatives: perhaps a crash program to develop “synthetic nerds,” or maybe an underground facility to store network engineers as a “strategic reserve.”
Today, evidently, the shortage of technical workers has changed to an excess. This too, shall pass. Demand will improve, and/or wages will adjust downward.
Labor markets adjust slowly, because there are costs to both employers and employees of making and breaking new arrangements. But eventually they do equilibrate.
(Just to be clear: I am not amused or in any way pleased by someone else being out of work.)
For Discussion. What other factors affect the speed of adjustment of labor markets?