In his September 4 guest essay in the New York Times, “Good News: There’s a Labor Shortage,” MIT economist David Autor presents a mix of good reasoning, error, and confusion.
Autor argues that a labor shortage (he really means “increased labor scarcity”) is driving up real wages at the bottom end of the pay scale and will likely drive them up further. His reasoning is good assuming all of his premises are right. But I doubt one of his premises: that paying millions of unemployed people more to be unemployed than to work does not cause a lot of people to stay unemployed. Co-blogger Scott Sumner dealt recently with what’s wrong with that claim.
Other parts of his reasoning are good. He writes:
For years, social scientists have warned that because of declining birthrates, retiring baby boomers and severe immigration restrictions, we’re approaching an era of labor scarcity.
But there are also two other claims, the first of which is, at best, confused and, at worst, wrong and the second of which is simply wrong.
Here’s the first:
There’s no future in working the fry station at White Castle.
It’s true that those who plan to work the fry station at White Castle shouldn’t plan on doing well in the labor market if they want that job long term. But surely Autor knows that the vast majority of people who take those jobs while young are not in those jobs 10 or even 5 years later. Those jobs are a stepping stone to better jobs and can teach young people some basic labor market skills: being punctual, taking responsibility, taking direction, and organizing their time, to name four important ones. That means that there actually is a lot of future in working the fry station at White Castle.
Imagine that Autor had said:
There’s no future in going to middle school, grades 6 to 8.
Everyone would see the problem with that reasoning. You won’t do well if you plan to be, and succeed in being, in middle school for the next 10 years. But everyone understands that middle school is a step on the way to better things. We can disagree about how much you learn in middle school, with co-blogger Bryan Caplan being on one end of that debate and me being almost on that end. But the point is that it’s not the final step.
Autor also writes:
Let’s say that you like cheap burgers and don’t lose sleep over the low wages burger flippers earn. Would it bother you to know that their well-being is subsidized by taxpayers? Members of the bottom fifth of U.S. households receive an average of $9,500 per person per year in means-tested government benefits like Medicare, Medicaid and food stamps. More than 20 percent of income for the poorest fifth of households comes from refundable tax credits like the earned-income tax credit, which supports low-wage families with children. So, one reason companies can pay such low wages is that you’re paying for the things their low-wage workers can’t afford.
The bottom line, he claims, is that “That burger isn’t as cheap as you think; it’s just that you’re paying part of your meal tab in federal taxes.”
Ignore the irony that the push to put the cutoff for means-tested benefits higher and higher has come mainly from the left. If Autor is arguing for tightening eligibility, then I’m with him, although I’m not sure he is.
Here’s the problem with his reasoning: he gets the shift in the supply curve wrong. Means-tested benefits tend to make workers less willing to supply hours of work at a given wage. So the programs he cites (other than the earned income tax credit, which is more complicated) shift the supply curve to the left, not the right, making wages higher than otherwise and making that burger more expensive than otherwise.
Seven years ago, Bryan Caplan dealt well with what’s wrong with an Autor-style argument about means-tested benefits leading to increased labor supply.
READER COMMENTS
Brandon Berg
Sep 6 2021 at 1:27am
I’ve been shouting into the void about the “welfare is a subsidy to employers” fallacy for years. I expect that nonsense from the likes of Bernie Sanders, but it’s deeply disappointing to see it coming from a respected economist like Autor.
Oddly, I have never seen anyone who claims that welfare is a subsidy to employers argue for cutting welfare expenditures to reduce or eliminate this subsidy, which makes me wonder whether this claim is actually made in good faith.
Mark Z
Sep 6 2021 at 1:59pm
Yeah, it’s depressing to see an economist of Autor’s caliber make such a basic error. The opportunity cost of working obviously goes up, not down, the more money you can make for not working.
Don Boudreaux
Sep 6 2021 at 6:38am
David:
Nicely done.
In the off-chance that anyone might be interested, here’s my own reply, as a letter to the NYT, to the Autor piece:
David Henderson
Sep 6 2021 at 12:59pm
Thanks, Don.
Good piece by you too.
Mike G
Sep 7 2021 at 10:17am
Don,
Great letter.
The Tom Brady example, however, is a bit off target.
Tom actually did discount himself to other elite NFL QBs, by an estimated $60 million over his career. That 2019 analysis, by Scott Davis and Cork Gaines, was decent and imo conservative. They chose Brees, Big Ben, and the Manning brothers as comps.
It is widely speculated that Tom “took less” precisely because of Gisele. In fact, Tom said that himself on Jimmy Kimmel.
The 2 competing theories, however, are that Belichick negotiates aggressively, and that Tom realized if he “took less” he could earn more long-term by winning Super Bowls, thereby increasing his personal brand.
Don Boudreaux
Sep 7 2021 at 1:34pm
Mike G:
Thanks. I’d always heard that Brady took a bit less – as many players do – in order to help to increase his team’s chances of winning. But even if the Gisele story is true, Brady’s annual salary remained far above the NFL average – which is all that is needed for the validity of my point to hold.
Don
David Autor
Sep 7 2021 at 1:44pm
Dear Don,
I regret that you’re misconstruing my point. Income-contingent benefits shift the labor supply curve, not employers’ willingness to pay out with labor supply held fixed. The EITC shifts that curve outward, thereby (likely) lowering equilibrium wages. Other forms of non-contingent benefits may shift it the other way. Given space limitations, I did not delve into these countervailing effects, but I would of course expect you to understand them.
David
Don Boudreaux
Sep 8 2021 at 5:31am
David:
Thanks for your response, the validity and fairness of which I readily concede. At my blog, Cafe Hayek, I reply to your response, which I also paste here below. Thanks again.
steve
Sep 6 2021 at 11:20am
“But surely Autor knows that the vast majority of people who take those jobs while young are not in those jobs 10 or even 5 years later.”
The average age of a fast food employee is now 27 and at MacDonalds they stay for almost 3 years. If you pay attention to the employees at fast food places you see a lot of older people. So in theory young people could learn skills at these places, and some do, but there has been a lot of change in these places. You see a lot more people who do work at them for many years and they are older when they start working at them.
Steve
Jon Murphy
Sep 6 2021 at 11:39am
Do you remember where you got that statistic from? It seems weird given that half of minimum wage workers are under 25 (according to the BLS). I want to see some things in the numbers:
1) Is it looking just at low-wage workers (ie production) or does it include supervisors, managers, etc.
2a) What is the median age? Some fast food workers are retired or just looking for something part time. Thus, a few older workers could greatly skew the mean.
2b) What’s the distribution?
steve
Sep 6 2021 at 6:38pm
Older Atlantic story which claimed to have gotten it from BLS. Too lazy to look at BLS myself.
https://www.theatlantic.com/business/archive/2012/11/mcjobs-should-pay-too-inside-fast-food-workers-historic-protest-for-living-wages/265714/
This site said 2.7 years. MacDonalds UK says 2.5 years for its employees.
https://www.zippia.com/mcdonald-s-careers-7238/
Jon Murphy
Sep 7 2021 at 10:49am
I found the data. The statement is correct but misleading.
The median age of everyone who works for a Fast-Food place is about 29 years old (2020). However, because of the way the BLS collects employment data, that figure includes not just counter workers but everyone working for McDonalds (and similar restaurants) including CEOs and the like. So, while it is accurate to say that the average [median] fast food employee is 29, it is inaccurate to conclude that the average customer-facing individual/individual on minimum wage is 29.
Jeff G.
Sep 6 2021 at 9:58pm
From the McDonald’s website: “The average age of an ‘hourly-paid’ employee is 20.”
Link
David Henderson
Sep 6 2021 at 10:24pm
Thanks. That seems plausible.
steve
Sep 7 2021 at 5:02pm
Your explanation could be correct but there are other sites which also list the average age much older. I think part of the problem is who you define as a MacDonalds employee. MacDonalds directly employs about 200,000 people. Franchisees employ about another 1.5 million. As a kid I worked in fast food and we were almost all teens except for the managers. When I go to these places now I see lots of older people working. Anecdotal but then there are no shortage of articles about teens not working nearly as much as in the past.
https://www.cnbc.com/2019/10/06/why-so-few-teenagers-have-jobs-anymore.html
OneEyedMan
Sep 6 2021 at 11:27am
“Means-tested benefits tend to make workers less willing to supply hours of work at a given wage.”
I understand how this works with a means tested benefit in general, the phase out becomes a tax on marginal income, which discourages work. You start off with a positive benefit, the benefit us gradually phased out with income, and this acts just like an income tax.
I don’t understand how this applies to a negative income tax like the EITC. This pays you more as you earn more, raising your marginal income, not lowering it.
As a negative income tax gets phased out, the marginal income tax rate is negative and become progressively less negative until it becomes zero and then at higher incomes, becomes positive again.
In this situation, doesn’t the marginal productivity argument imply that many of these workers will have reservation wages that are above their marginal products, but they will supply labor at a lower wage because their after tax wages, net of the negative income tax, is above their reservation wages?
I thought that the negative income tax had strong libertarian bona fides exactly because it changes the labor supply of workers through influencing the marginal tax rate.
I understand that the EITC is only part of the welfare state and most policies don’t work this way. As far as I’ve read, the effective marginal tax rates from phase outs can be very high in the lower end of the US income distribution, but this seems to reflect the design choices of the welfare state, not the existence of it.
Maybe I’m missing something obvious. I’d love to be set straight.
David Henderson
Sep 6 2021 at 1:02pm
I noted in my post that the EITC is more complicated.
You wrote:
I think that’s right. That’s why I said it’s more complicated. At higher incomes, the phase-out makes the implicit marginal tax rate quite high, thus discouraging labor supply.
Denis Drew
Sep 6 2021 at 1:21pm
EITC transfers 2% of income ($70 billion out of $13 trillion) — while 40% of our workforce is earning less than what we think the minimum wage should be. The minimum wage itself is no huge market resetting help (except maybe in an economy where the fed min is $1.10 lower than it was in 1950!) — min cannot be raised above what the lowest (weakest) union contract can squeeze out of the consumer.
Want to reset the US labor market to all the consumer will bear? Try this: https://onlabor.org/why-not-hold-union-representation-elections-on-a-regular-schedule/
john hare
Sep 6 2021 at 6:36pm
I followed your link and read the article. Do you want to make it even easier for an industry to be damaged and potentially outsourced entirely?? That’s a major component of union history. When labor is overpriced here, the industry will at some point move there.
I have work union a bit. Saw a lot of anti-productive behavior. My non-union company did some work on one union project when there were no union companies around to finish concrete. It blew up when they learned that my guys were clearing more than the union guys were.
robc
Sep 6 2021 at 11:09pm
40% earn less than $0.00 per hour? Seems unlikely.
Denis Drew
Sep 7 2021 at 6:17pm
http://fortune.com/2015/04/13/who-makes-15-per-hour/ (2015, paywall)
Floccina, see my reply just below.
robc
Sep 8 2021 at 10:16am
I think you missed my point. You may think the minimum wage should be $15, but used **WE**, and we think it should be $0.
By we, I mean sensible people.
Denis Drew
Sep 6 2021 at 10:11pm
Perhaps the answer is to raise the price of labor for jobs that cannot be outsourced. I always took outsourcing to be the equivalent of automation.
If Walmart paid $35/hr, then, outsourcing manufacturing wouldn’t hurt so much. 7% labor costs at Walmart — imagine what the Teamsters Union could do with that.
10%-15% labor costs more the norm. 25% labor costs for fast food.
Double income of bottom 40% earners to 20% of overall income — taking 14% of income from the “middle” 59%. They can get it back by waiting 10 years of per cap income growth — or by taxing it back from top 1% who doubled their income over recent (deunionized) decades. In any case they will pay higher prices if they want the lower 40% to show up for work.
Jon Murphy
Sep 7 2021 at 7:52am
The Law of Demand still applies. While a job may not be able to be outsourced today, that may not be the case tomorrow. If the price of labor remains relatively high, people will search out alternatives (including creating alternatives). See my earlier blog post.
Denis Drew
Sep 7 2021 at 12:59pm
Imagine a world in which buying consumer goods took place only on Mon-Tue-Wed-Thur-Fri — and — pay checks were only issued on Sat-Sun. (This is called a model — I just viewed The City of Lost Children and Dark City, so maybe I am in the mood for such a model.)
The places: a labor market where employers with 12.5% labor costs like Target and Walgreens — outliers WalMart and fast food with 7% and 25% labor costs. Employees double their pay on average: up 50% at fast food, up 2 1/5 X at Walmart.
To keep it simple prices for goods produced by lower income workers go up about 12.5% across the board — demand falls 12.5% …
… Mon thru Friday; on that particular Mon thru Fri.
Sat comes; lower cost workers average double their pay — for producing possibly fewer goods — so far; Mon hasn’t hit yet.
Mon comes; lower cost workers take all that extra money that they got paid for selling possibly fewer goods — and start using that exact same money (those exact same dollars) to purchase goods and services — probably proportionately more on goods produced by lower wage workers (proportionately more than the overall 100% of consumers would have spent them on).
Floccina
Sep 7 2021 at 4:54pm
I think that people on the other side of the labor supply welfare argument assume that the bottom 10% of earners would be to weak to work or die without the welfare programs, which seems absurd in the developed word. People are tough and even homeless people can survive into old age (I know one) and in the developed world it is not hard to get free food and (IMHO we should help the homeless more rather than giving so much to middle-class and up old people nevertheless) Abraham lived in tents.
White castle has a career path plus I once worked in a Restaurant where one of the dishwashers was slow mentally but he had been a reliable worker for a long time and so got raises and he was making more than many of the cooks. He was there when they needed him unlike many of his smarter colleagues.
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