Except if remuneration—the price of labor—is capped by government, there can be no more shortage of labor than a shortage of, say, steel. As is currently the case, labor can become more expensive like car rentals have become; it could be very expensive, like BMWs, if demand were even higher compared to supply. But if a market price obtains at which as much as one wants is available, speaking of a shortage is a confusing use of language. Indeed, it is precisely because a non-government-controlled price can rise, thereby reducing quantity demanded and increasing quantity supplied, that there is no shortage. (See my econlog post “Don’t Confuse Shortage and Smurfage.”)
When an employer says he cannot get the labor he needs, he is typically trying to say (assuming that remuneration is determined on the free market) that he cannot get as much of it as he wants at the current remuneration rate (wages and benefits), and does not find it worthwhile to pay more. In other words, he does not “need” more labor more than he needs more Champagne and a Ferrari. If he did, he would bid up the price until he gets what he wants or until he decides he wants it less than higher bidders do. A free market is a permanent auction where ordinary individuals can bid microprocessors away from Ford, as they have been doing for their PCs and game consoles.
This little bit of economic theory is illustrated by a Wall Street Journal report: Patrick Thomas, “This Summer, Jobs Come With a Hefty Signing Bonus (July 1, 2021). The reporter observes:
As U.S. employers’ search for hires increases in urgency—especially in the manufacturing, logistics, healthcare and food-service industries—truck drivers, hotel cleaners and warehouse workers are being offered signing bonuses of hundreds and even thousands of dollars.
These increases in remuneration are widespread across the service industry, including restaurants and hospitality businesses. Some other examples:
A pest-control service specialist job in Charlotte, N.C., comes with a $1,200 bonus. A diesel mechanic job in Gulfport, Miss., advertises a $1,500 bonus. A forklift operator job in Gainesville, Ga., with Kubota Manufacturing of America pays a $2,000 bonus. …
In June, nursing jobs offered hiring incentives ranging from $100 to $30,000. In food preparation and service roles, signing bonuses ranged from $100 to $2,500. …
“It gives us a leg up,” [Kubota’s Phil Sutton] says. “It’s been a great success in terms of recruiting.”
The reason is not that business owners have become nicer, more charitable, or more woke. Their demand for labor (a “derived demand” in economic jargon) has increased because the consumers’ demand for their products has grown. And they want to satisfy their customers’ demand because that’s how they earn a living.
“Businesses are jockeying for workers,” [Brad Hershbein, senior economist at the W.E. Upjohn Institute for Employment Research] said. … They are going to try that first, and if it’s not enough, then they will have to do persistent wage increases.”
It has already started. One example:
Foodservice distributor US Foods Holding Corp. posted a night warehouse role for the 5 p.m. to 3 a.m. shift in Coralville, Iowa, that pays between $18 and $23 an hour, with a $5,000 signing bonus, and medical, dental, vision and life insurance and a 401(k) starting on the first day of employment.
People respond to incentives, so higher remuneration brings more labor from within or outside the industry, or from people not in the labor force. A $1,000 signing bonus, coupled with a $1,000 retention bonus, helped the Choctaw Casino & Resort in Oklahoma “hire hundreds of people in less than 90 days.” Note that the soon expiring or already expired unemployment supplements of the federal CARES Act did not create any labor shortage in the proper sense of the term, although they did reduce labor supply and increase the market price of labor.
Employees move to the occupations that pay them more because the goods or services produced in these occupations are currently the most valued by consumers. This happy result requires that remuneration be allowed to adjust on free markets. We have all heard the stories of Cuban physicians, whose remuneration is controlled by the state, switching to taxi driving because it pays more. We can guess there is a real shortage of physicians in Cuba.
Interestingly, nobody criticizes “price gouging” by workers. They move to the jobs for which, other things being equal (including their tastes, of course), they get the best remuneration. This system is economically efficient for the same reasons that it is efficient to let the prices rise of any market where demand increases or supply decreases; for the same reasons that “price gouging” laws are detrimental.
There are not many exceptions to the economic law that price increases solve shortages. One exception is that long production lags and long-term contracts for non-standardized goods may delay this adjustment as we are seeing in the market for microprocessors. Another one is the possibility that a significant number of customers (notably socialist-minded ones) like established stores to privately ration goods by limiting the number of items a customer can buy or by having no item to sell at all. Still another exception, of course, is when the government forbids suppliers to increase prices (or to increase them more than necessary), as we saw during the pandemic. In that case, governments’ harmful success was fortunately mitigated by the diversity of “price gouging” laws across the states and the grey markets that developed, notably online.
READER COMMENTS
Fazal Majid
Jul 4 2021 at 1:07pm
There is also the fact once an employee is hired at a set salary, it is usually very hard to impossible to reduce the salary as the market goes down, thus saddling the employer with long-term extra costs, but that can be priced as an option value, and there is an opportunity cost to forgoing business today because of excess costs tomorrow.
Does anyone really take seriously employers’ whining about labor shortages, though?
Andrew_FL
Jul 4 2021 at 2:34pm
Labor supply has shifted inwards, for a variety of reasons, mostly artificial (ie government intervention).
So it is correct that say there is no “shortage” but is also correct to say labor supply is currently less than it would normally be, and that’s a problem.
Andrea Mays
Jul 4 2021 at 6:39pm
“And that’s a problem”—perhaps the employer would rather not pay higher wages—fair enough. But rising compensation and bonuses are not a “problem” for those employees who receive them!
Andrew_FL
Jul 4 2021 at 11:04pm
It is not higher pay that is the problem, it is that even with higher pay, fewer people will be employed.
Pierre Lemieux
Jul 5 2021 at 12:08am
Andrew: No. If higher pay is caused mainly by higher labor demand (as seems obvious currently), labor supplied and demanded will increase (as is also obvious currently). Draw a supply-demand graph and move the demand curve up: both price and quantity increase. (have a look at my Econlog post “A Frequent Confusion and the Yo-Yo Economic model.”)
MarkW
Jul 5 2021 at 7:17am
If higher pay is caused mainly by higher labor demand (as seems obvious currently)
But is that obvious? I would have said that it’s caused mainly by lower labor supply, and more people staying on the sidelines (some of which are still there because they’re enjoying the enhanced unemployment). It would be one thing if the labor force participation rate was back to pre-pandemic levels and employers were still struggling, but that doesn’t seem to be the case.
Pierre Lemieux
Jul 5 2021 at 12:22pm
Mark: If higher wages were mainly caused by a lower supply, quantity (of employment) would decrease. Trace a demand and supply curve on a graph and move the supply curve up. (But don’t go back to the Flood: it would not be useful to understand the evolution of the past few months.)
Andrew_FL
Jul 5 2021 at 2:17pm
“If higher pay is caused mainly by higher labor demand (as seems obvious currently)”
I’m not confused about how supply and demand diagrams work, I am disagreeing with this premise. Supply has moved inward. As far as demand goes, you and I are comparing to different baselines. Demand has increased since last April, there is no evidence it has increased since last February.
Spencer Hall
Jul 4 2021 at 3:31pm
There’s also a greater mismatch of skills with inexperience, with education and and sheer laziness.
Andrew_FL
Jul 4 2021 at 4:20pm
Then why are teenagers employed at higher rates than before the pandemic?
John hare
Jul 4 2021 at 7:24pm
Because they aren’t collecting unemployment from jobs they never had
Andrew_FL
Jul 4 2021 at 11:03pm
Exactly
David Seltzer
Jul 4 2021 at 5:09pm
Pierre said: “Interestingly, nobody criticizes “price gouging” by workers. They move to the jobs for which, other things being equal (including their tastes, of course), they get the best remuneration. This system is economically efficient for the same reasons that it is efficient to let the prices rise of any market where demand increases or supply decreases; for the same reasons that “price gouging” laws are detrimental.” It seems Tom Brady, the GOAT, by acclimation, is just such an example. A free agent, he offered his services to The Tampa Bay Buccaneers for sixty million dollars. The Glazer family thought it was a fair price and they agreed.
Jon Murphy
Jul 5 2021 at 6:42am
Anecdotally, in my neck of the woods (Cape Cod), I’ve noticed the Second Law of Demand kicking in. Firms are becoming way more elastic in their demand for labor. Many places are reducing hours or services to cut back on their need for labor. Or they are substituting capital. One local store announced they’re going to an all-automatic checkout system.
Thomas Lee Hutcheson
Jul 5 2021 at 7:02am
Since so many firms are using hiring bonuses, it is surprising that unemployment insurance is not structured to include a job-finding bonus.
Pierre Lemieux
Jul 5 2021 at 2:52pm
Thomas: This is a good question and even more intriguing if one assumes that the state is a benevolent and omniscient organization that efficiently maximizes the utility of all its citizens or subjects (a bit like GM maximizes the profits of all its shareholders). The question is somewhat easier to answer if you model the state on the basis of other assumptions. Here are two such models:
(1) The state maximizes its power and, as a means to that, maximizes the dependence of its clients.
(2) The state maximizes the benefits of its tenants (rulers and bureaucrats) and thus has little incentives, or at best only indirect incentives, to maximize the utility of all its clients (even assuming it could maximize the utility of all without reducing the utility of any).
Craig
Jul 5 2021 at 8:46am
“Except if remuneration—the price of labor—is capped by government, there can be no more shortage of labor than a shortage of, say, steel.”
But the word ‘shortage’ depends on the sense that the word is employed. Yes, in one sense the government is buying the labor. In one sense these people are employed, they are employed in a better paying ‘no show’ job that pays more. To qualify for this fantastic ‘job opportunity’ one needs to be — ironically — unemployed of course, so most reasonable people would call them ‘unemployed’ Still, many people would call what the government is doing with the unemployment on steroids as causing a shortage. NJ UI at one point was $1313 per week with the $600 boost (now $300 addl). Yes, the government continues to artificially increase the reservation wage over and above what it was pre-pandemic.
Yes, businesses might, as Biden might whipser, “Pay them more” — but they have to pay alot more than what they are getting to get them to come in. How much would you have to pay somebody per week to go off of NJ unemployment of $1313 per week, or now $1014 per week? Well, $1015 isn’t going to cut it and $1500 isn’t going to cut it either because many workers need to worry about childcare. One thing I discovered working remotely is the astounding amount of money I was spending just going to an office. So you have a situation where many are getting more to be on unemployment, but even if they aren’t getting more, bottom line people will often be willing to take alot less to get the ‘job’ of being on ‘unemployment’ because they don’t have to actually work for it. Or they are officially on unemployment and taking black market ‘under the table’ employment. [I suspect this is why non-corporate restaurants seem to have people, all of the ‘traditional’ under the table businesses don’t seem to have issues in FL that I can see]. Now of course many states have ended the bonanza and already people are going back to work.
We also see incidental issues like the child care credit and other stimulus initiatives which are dependent on being under certain income thresholds and the government is creating a situation where a 2nd earners in a household simply won’t want to go over the qualifying incomes or they’re in a situation where it doesn’t make sense to even bother earning the second income.
Pierre Lemieux
Jul 5 2021 at 1:19pm
Craig: One may of course define “shortage” as one wants to. For example, if I define it as “shitty weather,” I can say “Don’t come and see me tomorrow, for a shortage is expected.” (Another benefit of this definition is that we would avoid a somewhat vulgar word.) Or one may define a shortage as “high price,” like in “there is a shortage of Ferraris,” or “the poor are facing a serious shortage of tobacco.” It’s more useful, though, to use the economic definition as it allows us to name something that otherwise does not have a name and to identify and analyze a market phenomenon that is more difficult to analyze if we need to use a long paraphrase every time. See “Don’t Confuse Shortage and Smurfage.
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