Walmart is providing another illustration that here is no “shortage” of labor if we take the word in its economic meaning of empty “shelves” at free-market prices (or wages, which is the price of labor). If we take the word in its confusing sense of “high prices,” then there is a shortage of everything: diamonds, Porsches, olive oil, Bourgogne, etc. (We must distinguish “shortage” and “smurfage.”) Because resources are relatively scarce in relation to human desirers, no economic good has a zero price—except perhaps when property rights are not well defined.
Much of what producers (including intermediaries, as economic usage goes) call shortages of inputs such as labor is not actually of the nature of shortages, except perhaps in the short run, and usually the very short run. What they mean is simply high prices they don’t want to pay because final consumers would not pay the corresponding price increases. When consumers are willing to pay higher prices because market demand has increased or supply has decreased or both, it is this willingness to pay more that leads producers to bid up input prices. The demand for an input, economists say, is a “derived demand”—derived from consumer demand for the final product.
When consumers prefer to pay more rather than going without a good and its price is not capped by government edict, there is no supply-chain “snarl”or other vain emotion, only a higher consumer price and, if the industry is large in input markets, higher input prices. This is quite obvious in the current case of personal computers, whose prices have jumped enough to persuade producers to bid up the price of microchips to make sure they get them. It is an important result of economics that only free market can make these complex calculations; government planners (bureaucrats or politicians) cannot.
Consider Walmart (“Walmart Dangles $110,000 Starting Pay to Lure Truck Drivers,” Wall Street Journal, April 7, 2022). Because consumer demand for its wares is increasing, Walmart needs more truck shipping capacity than provided by its current 12,000 drivers. The company needs to retain its drivers and to hire new ones. In the meantime, the supply of truck drivers seems may be decreasing as some are attracted to other occupations. Thus, the company is now offering an annual salary up to $110,000, plus sign-on bonuses in certain cases, to divert drivers from other industries where consumer demand is not as pressing; the offer is also available, together with a 12-week training program, to some of its own employees from elsewhere in the company.
I suppose a socialist would say that this is how a capitalist company exploits workers and cheats consumers! Note also that each time another employer is hiring a truck driver, he is successfully bidding for labor against Walmart.
On the supply-chain front, we have seen a similar phenomenon before last Christmas when companies such as Walmart, Home Depot, and Target chartered their own cargo ships to bring to the shores of America what their customers wanted (see my Econlog post “The Supply-Chain Myth, November 18, 2021).
READER COMMENTS
Jon Murphy
Apr 10 2022 at 12:08pm
I think this is a good example of why we do not need “industrial planning” or any schemes to “protect the supply chain.” People are already adjusting to the challenges faced. Walmart and others are working to ensure their supply chains are protected. They are taking into account the new challenges faced and are devising plans to overcome them.
Pierre Lemieux
Apr 10 2022 at 9:25pm
Jon: Yes. The other side of the coin is that if a “supply chain” does not work due to market factors, it is more likely to be eliminated by the market’s “creative destruction” than repaired by the government’s creative meddling.
Craig
Apr 10 2022 at 1:31pm
Moving from NJ to FL, why not ship the container to Port Newark and then float it down the coast to FTL? Not sure, but perhaps the Jones Act might be to blame?
I am surprised you didn’t tie this into the articles on the impact of the Jones Act. It protects certain American shipbuilders, but perhaps incidentally protects the trucking industry/Teamsters?
Pierre Lemieux
Apr 10 2022 at 9:18pm
Craig: I understand that Jones Act ships are especially inefficient and thus costly. It is possible that this government intervention indirectly helps the trucking industry or the airline industry or the steel industry, and indirectly harms American ports. the container industry, or (who knows?) the national biscuit industry. I don’t know. My point was not to promote the trucking industry, but to argue that, whatever inefficiencies and churning all government interventions cause, the remaining free-market prices and wages still serve consumer sovereignty.
steve
Apr 12 2022 at 10:10am
Talked with daughter last night who is in China with her family. Her husband runs a factory there and she does some computer stuff I dont understand. Anyway, they say things are getting rough there. They expect the factory to close for a while. what would you expect this to do to prices of their products? This is one of three facilities the company owns. Assume demand, according to husband, is fairly inelastic.
Steve
Pierre Lemieux
Apr 12 2022 at 11:30am
Steve,
I understand the main problem right now in China is the lockdowns and business shutdowns or slowdowns that the government is imposing to control Covid (by controlling the population!). If one factory closes that produced goods with close substitutes, which is the standard case, one expects an infinitesimal impact on prices. In other words, one factory typically faces a very elastic or infinitely elastic demand. (Of course, I don’t know the details of your son-in-law’s business.) Now, if the supply of many products is slowed down by government edict, the impact would be a one-time jump in the general level of prices–and a continuous increase, i.e. inflation, if the government adds an increase in the money supply.
steve
Apr 12 2022 at 5:36pm
A one time jump? Wouldn’t it persist until the factories are back at work? Anyway, soon this case you would not call a price increase inflation ie absent increased money supply?
Steve
Pierre Lemieux
Apr 14 2022 at 11:50am
Steve: Yes to the second question. As for the first, it would be a one-time increase (“jump”), after which, of course, the price would stay at it new level until production is back, as you suggest.
Andrew_FL
Apr 12 2022 at 12:49pm
Again, the problem is that employers are having to bid against the government.
Jon Murphy
Apr 12 2022 at 1:44pm
Excluding the Census push in 2019/2020, government hiring hasn’t really changed that much. I’m not sure government is the main competitor driving up wages here.
Johnson85
Apr 12 2022 at 3:10pm
Anecdotally, it sure seems like the government was competing in the form of unemployment benefits. We have local fast food joints advertising to hire people for $10 an hour now. Not sure if anybody is applying, but that would have been laughable 6-8 months ago, as it was hard to hire people then at $15 an hour.
For our lower paid jobs, we were pretty much only getting applications from people who were already employed. They were generally looking at us because our benefits are better than average, although some were also getting raises by coming over. Over the past few months, we seem to be seeing an uptick in applicants with stretches of unemployment. I suspect these may be people that were enjoying government benefits while they lasted, as basically anybody that wanted a job could get one at that time.
Andrew_FL
Apr 12 2022 at 3:40pm
Exactly. I’m baffled by econloggers not getting this. Sumner accurately called the labor market dynamics of the last year almost exactly a year ago.
The only thing he was wrong about was an overly optimistic timeline for the exit from this.
Jon Murphy
Apr 12 2022 at 3:50pm
Oh. That’s not typically how the word “competition” is used, so I was confused.
Yeah, UI is playing into this somewhat. Less so now then a year ago, though. Now the issue is people quitting and searching for new jobs (and quitting does not invoke UI).
Andrew_FL
Apr 12 2022 at 4:23pm
This is why I said “bidding” not competing
Jon Murphy
Apr 12 2022 at 4:30pm
Right, but bidding is part of the competitive process.
And “bid” doesn’t make sense in this context.
UI created an incentive for employees to be more selective about their jobs, but government wasn’t “bidding” against employers. Bidding is a verb.
Jon Murphy
Apr 12 2022 at 5:44pm
By the way, my point is not merely semantic.
Bidding implies that the market is moving toward efficiency. If government was bidding up the price, then that would imply the market was out of equilibrium and thus moving back to equilibrium.
Treating UI as what it is (an incentive with the unintended consequence of causing prolonged unemployment) implies the market is not efficient, or otherwise being disrupted.
Andrew_FL
Apr 12 2022 at 7:25pm
The market is still working efficiently, taking the policy environment as a given.
johnson85
Apr 13 2022 at 12:16pm
If I were going to be really precise, I would say the government is bidding up the reservation wage for workers, particularly on the “lower end” of the quality scale (quality being some combination of marketable skills and drive/ambition and work ethic).
I am missing your point on bidding implying the market is moving towards efficiency. I don’t think that’s generally correct? Maybe I am not thinking clearly about what efficiency means in this context, but in a competitive bid process involving sealed bids, it’s not uncommon to see bidders bid below the cost of the work (b/c of misunderstanding or miscalculating or whatever reason). Is that efficient under your definition?
Pierre Lemieux
Apr 13 2022 at 10:52am
Andrew: There is a difference between “competing” on the one hand and, on the other hand, UI or other forms of giving. If we still want to use “competing” for UI, it only “competes” in markets for very unproductive labor: probably nobody capable of driving (or learning to drive) a Walmart rig would choose instead to go on UI.
Although school canteens or a private charity neighborhood canteens may, at the margin, persuade a low-productivity worker from getting a low-pay job, it is arguably not useful to say that they are “competing” for labor. If I cut a toy gun in wood for my son, am I competing with Cabela’s toy department? For sure, there is a difference between private and public giving, but that’s the angle from which to look at the related issues.
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