Why don't firms pay more?
By Scott Sumner
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.