I often see people argue that if companies are short of workers then they should pay higher wages:
Many businesses say extra unemployment benefits put in place during the pandemic have given some unemployed workers the incentive to stay home. In some states a jobless worker can earn almost as much or even more in benefits than what their old job paid.
The Biden administration and other skeptics of that argument say the solution is simple.
“Pay them more,” the president said last week.
In fact, it is unrealistic to expect companies to boost their wage rate if doing so will reduce profits, and perhaps push the company into bankruptcy. There are many reasons why higher wages might not be the optimal way to address a labor shortage. One problem is downward wage stickiness after the economy returns to normal:
The number of workers quitting their jobs has climbed to a record high. Most of them did so because they found another company desperate enough to hire workers that it paid more.
Yet companies are only going to go so far. While it’s easy for businesses to raise or lower prices for customers based on the costs of their own supplies, they are loath to cut wages because of the damage it causes to employee morale.
“You can’t take labor wages away,” said Timothy Fiore, chairman of manufacturing survey produced by the Institute for Supply Management.
Another problem is that consumers might refuse to purchase goods if the price is too high:
Many are in very competitive industries and they can’t easily pass higher labor costs onto customers.
You can raise the wage of people who pick tomatoes in California, but you can’t stop consumers from switching to Mexican tomatoes if the price of the American version becomes too high. You can raise the wages of Uber drivers, but you can’t force people to use Uber.
There are many ways in which society might try to raise wages for low wage workers, all of which have drawbacks:
1. Socialism. Delink wages and productivity.
2. Minimum wage laws.
3. Worker training programs to boost productivity.
4. Government wage subsidies for low wage workers.
In my view, option #4 is the least inefficient method. But one thing I know for sure is that simply exhorting companies to pay higher wages won’t work. Companies will generally set wages at the profit-maximizing level.
So should companies stop complaining about a shortage of workers? No, keep complaining. Maybe Washington will stop paying people not to work.
READER COMMENTS
Thomas Lee Hutcheson
Jul 7 2021 at 6:18pm
Or just turn the remaining supplemental UI into a job finding bonus.
And get more people vaccinated.
MarkW
Jul 7 2021 at 6:31pm
Companies will generally set wages at the profit-maximizing level.
Or if they don’t, the competitors that outcompete and ultimately replace them will.
Daniel
Jul 8 2021 at 8:14am
True in theory! But the key word is “ultimately” and that could be a very long time horizon indeed (https://marginalrevolution.com/marginalrevolution/2018/04/lessons-from-the-profit.html).
MarkW
Jul 8 2021 at 8:50am
I had the same reaction to watching a few episodes of ‘The Profit’ — how on earth did these businesses survive this long? So yes, there are marginal businesses that manage to limp along for far longer than you’d expect. But they’re small and not growing or expanding their market share. They may never actually go bankrupt, but when the owners are ready to retire, they close up rather than sell (because the business is worth less than the inventory and real-estate). I’ve seen this many times with small-town independent grocery stores. And who occupies the market niche instead? Highly efficient dollar stores. That’s what the process looks like — and no it is not necessarily speedy, but it is inexorable.
MarkLouis
Jul 8 2021 at 9:52am
And how do you assess whether that competitive-mechanism is working to the degree we expect? The spread between corporate returns on capital and the risk-free rate is probably the highest in history. As a result, the entire burden of our slow-growth, low-productivity economy has fallen on labor and capital has been spared. Is this what your theory would predict?
john hare
Jul 8 2021 at 4:43am
5. Quit convincing people they deserve more because, because, because, oh yeah the reason companies don’t pay what you are worth is because they are greedy.
There is a very serious problem with many people not being aware that productivity is the basis of their worth to others, including an employer. Wanting more is normal and healthy, but thinking that getting it is a matter of forcing is the opposite. While it’s not all up to the individual what they do with their life, the overwhelming majority is, and that is not as widely understood as it should be. I do put much of the blame on institutions (politicians, educators, media) for pushing a self destructive narrative on people.
There are clearly some roadblocks for some people moving ahead in some careers, there are other roads and other careers.
Dylan
Jul 8 2021 at 8:18am
The problem is, measuring productivity of an individual employee is really hard. If I remember correctly, you work in construction, and I imagine it is a little easier in that setting, but for your typical “knowledge worker” how do you do that? Take a scientist working to develop a new drug. Many will work their whole career and never work on a drug that makes it to market. I know many people that have only worked for companies that have never had a dime of revenue, and most of those will fail before they ever have a product. How do you measure the productivity in that situation?
I worked for a decade for a wage far below market, because I looked at my productivity and figured I couldn’t possibly deserve more than I was getting. I looked at what colleagues in other businesses made for doing similar work, but I knew they weren’t productive enough (in terms of adding value) to deserve that either. And sure enough, the companies they worked for failed one by one over the course of a few years, as the vast majority of businesses do, but the employees of those failed companies were in a far better position than I was.
john hare
Jul 8 2021 at 8:07pm
I suspect we are talking about very different types of people. At the low end, there are many that are a liability to the company at almost any wage. It is remarkably easy to gauge productivity on individuals that are non-productive at best. Often they are the ones blaming others for their problems. And decades later, they are still blaming others. My complaint is more with the institutions and individuals that teach and enable the helplessness.
For the vast majority of people in the bottom layers, there is a way out and the person able to and responsible for finding that way is in their mirror. There are barriers and bad companies, but as Lizard Man says, learn the skills and move on to organizations where you are properly appreciated.
You might be in a field where it’s not so cut and dried. Virtually all the industries I deal with are quite transparent. You clearly made some rational and moral career decisions. At my level, people that do that move up or on.
Dylan
Jul 9 2021 at 6:09pm
I’ve certainly known people like that. However, I disagree that, even at the low end, it is all that easy to gauge productivity outside of the extremes. I met my wife at a minimum wage job. She was one of the most productive people there, quick, efficient, detail oriented. The kind of employee any employer should have loved to have. But, she wasn’t showy about it.
Me, on the other hand, I’m habitually slow and easily distracted. Consequently, I’d end up staying late finishing up things that I really should have gotten done during the normal part of my shift. I’d feel guilty about it, so I’d sometimes clock out early and continue working.
In an efficient world, my wife would be the one that gets promoted and recognized and makes more than I do. But, of course it was the opposite. My work was seen as burning the midnight oil, and really committed to this minimum wage job. Her contribution wasn’t recognized at all, and it really felt like they had no idea what she was doing. When I tried to tell them that she was more productive than almost anyone there, it was like they just couldn’t see it.
That is typical of her experience at many, many jobs over the years. When I moved into an office job, it became even more clear that what matters is that you look like you’re productive, more than actually being productive. How many people sit at their desks all day long and surf the internet, and only put in 15 minutes of real work? Quite a lot if the stats on “Cyber Monday” are to be believed.
Tom
Jul 21 2021 at 12:36am
It’s often even easier than that. Just conform to what people *think* someone in the job should look like.
I look like and present like a geek and can communicate reasonably effectively, and I found it amazing just how quickly I would be the guy that the boss comes to for technical advice, bypassing the non-geeks (mostly women) who had vastly more experience and wisdom but didn’t fit in the boss’ comfort zone of who should know this stuff.
That said, I imagine I’m much the same for areas that I know little about. It’s just in my case, no-one is getting hired or promoted based on my biases.
Lizard Man
Jul 8 2021 at 8:40am
If productivity is a function of an individual worker’s characteristics, than how is it the case that workers can get raises by finding new employers?
If you are working for a sh*tty employer, you are being underpaid. Find a job with a better employer, and then you will be paid according to your productivity, not according to the incompetence of management.
Andrew_FL
Jul 8 2021 at 8:58am
I think this is the first time two recent Econlog posts have taken opposed stances, that I’m on the side of Scott Sumner!
MarkLouis
Jul 8 2021 at 9:33am
The issue I see is that corporate returns on capital have remained steady (and high) despite the dramatic fall in risk-free rates. In a truly competitive system you’d see expected returns fall along with the risk-free rate and this would leave a lot more budget for spending on labor or investment. Capital doesn’t seem to bear any of the burden of our slow-growth, low-productivity economy. I can see why this feels unfai. What does it say about our system?
Scott Sumner
Jul 8 2021 at 12:36pm
To the extent that the share of national income going to capital has increased since the 1960s, it’s mostly gone to owners of residential real estate. In this sector, NIMBY rules are the culprit.
MarkLouis
Jul 8 2021 at 1:30pm
I agree but you never hear economists say “wages would be higher if we had better zoning policy.” So it’s hardly surprising people are frustrated at wages – they know there is a disconnect between labor & capital but it’s never explained to them.
Lizard Man
Jul 9 2021 at 7:41am
I thought that the consensus among economists was that zoning was depressing wages by very large amounts. Maybe I just read a biased sample of economists? The economists at this site I think all believe that zoning is depressing wages.
MarkLouis
Jul 8 2021 at 2:55pm
Also, if there are excess returns to capital in housing why would that detract from labor and not simply from returns on other forms of capital? Seems to me we don’t understand this labor vs capital dynamic too well (hence the “undershoot” of GDP alongside no “undershoot” in wealth).
Orkun Baysal
Jul 8 2021 at 4:35pm
There is a fifth way to boost wages. Lowering taxes on wages.
Matthias
Jul 9 2021 at 3:42am
Why do you put land and capital in the same bucket?
Brian Donohue
Jul 8 2021 at 10:50am
Agreed, very good post. The easiest way to effectively introduce a wage subsidy is to reduce FICA taxes.
Floccina
Jul 8 2021 at 1:05pm
Right and if they want to continue the charade that Social Security are put FICA and matching FICA on the pay stubs, saying $x was paid to FICA for your retirement by taxpayers. I do not like hidden taxes and benefits.
Floccina
Jul 8 2021 at 12:37pm
Can that be dealt with via a signing bonus that you get if you stay with the company for some period of time?
Dylan
Jul 8 2021 at 2:48pm
That’s how one company that I work with has dealt with it so far. They have seasonal employees, with peak summer employment and UI was making it very difficult to recruit. They offered a bonus contingent on them staying through the end of the summer. Seems to have worked well so far.
Rajat
Jul 8 2021 at 7:17pm
Of course, the hip explanation for why firms don’t pay more is that because despite operating in ‘very competitive’ markets themselves, they’re monopsonists. The solution is apparently higher minimum wages, although efficient minimum wages would presumably require individual minimum wages set for each firm.
The RBA Governor last month offered a similar explanation from an Australian angle:
This was reported in some quarters as Governor Lowe accusing businesses of being ‘stingy’:
I haven’t included a link between more than one link in a comment seems to trigger EconLib’s content moderation.
Rajat
Jul 8 2021 at 7:19pm
* I meant a similar explanation to yours, not similar to the monopsony explanation.
Scott Sumner
Jul 10 2021 at 1:44am
It is interesting that Covid is having similar effects in many different countries.
Phil H
Jul 9 2021 at 8:27pm
“So should companies stop complaining about a shortage of workers?”
They’re welcome to keep complaining. Freedom of speech and all that. But no one should pay much attention to them because (1) as a consumer, I don’t pay companies to talk, I pay them to make stuff for me. The more energy they’re putting into talking, the less they put into making good stuff. (2) as a politician, companies don’t vote.
There’s a word for corporate speech: advertising. Advertising is the speech of capital trying to maximise itself. As a person, the correct response to that speech is: sure, I’ll listen to you to the extent that you make my life better. Complaining rarely makes my life better.
Warren Platts
Jul 12 2021 at 5:06pm
#5 Easy. Manage for a tight labor market by restricting immigration.
That way, the quantity demanded matches the quantity supplied. Only cost to the taxpayer is the increased cost of border enforcement.
SK
Jul 17 2021 at 4:00pm
In any number of lower wage paying jobs, machines have been taking the place of workers and this will continue on.
No discussion of taxes and how an increased corporate tax will affect wages?
Even for those lucky enough to get a wage increase, those with subsided company health care plans see those costs to them going up, negating any wage increase.
Real wages have been negative.
Recent quarterly reports for any number of companies highlight increased pricing for some with lower volume/ unit sales. This could be telling. And those in very competitive industries have lowered revenue and profit outlook saying costs up, but delayed ability if any to pass through increased costs to customers. Yep, elasticities.
As to the overall economy , it seems to me Stagflation is becoming an increasing risk.
What will Mr. Powell and co. do if GDP in any of the next few quarters comes in lower than all are anticipating and inflation remains hot?
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