I reprint an essay I first posted almost a quarter century ago.
Although most economists would share my confidence that the market can take care of a labor shortage, there is much that we do not know. We do not know how far away the current wage rate is from the one that is consistent with no excess demand for labor. We do not know if the process of wage adjustment will be inflationary (nominal wages rising) or deflationary (prices falling relative to wages). We do not know how long the process may take.
That was in 1997. In today’s environment, I would bet that the upward adjustment of wages will take place in the context of inflation. As I write this, prices are going up faster than wages, which exacerbates the appearance of a “labor shortage.” Market forces are likely to drive wages higher, and we will see history repeated. Not like 1997. More like 1977.
Valuable discussion of the fact that it is meaningless to talk of a shortage without regard to supply/demand curves. But there is no mention of an important factor on the supply side – mass immigration.
I have some friends who hire a lot of low wage employees. They have been complaining about “labor shortages” every year for as long as I’ve known them. But they are savvy businessmen and are fully aware that normal supply and demand curves intersect, after all, that’s how it works for most of their physical inputs and in the markets for their products. If pressed they will acknowledge that they aren’t being fully accurate in expressing the situation in this way.
But they will also say that they aren’t just blowing smoke, that “shortage” is reasonable short-hand, as it were, for the reality of the situation, because labor is different.
What they will say is that, sure, from equilibrium their demand curve slopes downward to the right, but it doesn’t go upward to the left, and that past a certain wage, it just goes horizontal – straight to zero quantity demanded – because at that point there *is* no viable domestic production. For certain products facing competitive imports, they would just go out of business altogether if they had to absorb higher domestic wages.
Likewise, on the labor supply curve, sure, after equilibrium, it slopes upward to the right. But it *also* flattens (nearly) horizontal to zero when going to the left, not just because of minimum wage laws, but because of welfare and other factors contributing to the social “reservation wage” for such work, which operates like an effective minimum wage too.
So, if these regions of inelasticity and nearly parallel lines are just to the left of the current equilibrium point, they just have very little slack, and if the supply curve shifts up even a little bit then, boom, that business simply ceases to be done in America.
Now, whether or not that’s a good thing – creative destruction, gains from trade, comparative advantage, and all that – from the point of view of a businessman who thinks he has no wage slack, the phrase “labor shortage” if, in not quite a fully accurate account of the situation, good enough to communicate their ‘desperation’ (as they would describe it).
We tried to create a consumption floor for those that don’t want to work, but many aren’t productive enough to reach that floor (ZMP workers).
To the extent they could increase in skill above that floor, they either can’t do it fast enough or someone overseas can do it faster or cheaper (sometimes but not always by cutting corners).
When we had to have a deck built it got subcontracted out to another company which subcontracted it out to some dudes they obviously picked up on the corner of Home Depot. They clearly had never built a deck before, and they were basically just opening the boxes and reading the instructions. They did such a poor job the company had to send another crew out to pull it apart and rebuild.
That’s what happens when CARES funding is chasing every single construction contractor in the country at once. You can’t increase supply because even at higher prices those marginal workers still can’t build a deck correctly.
So, with the unemployment benefits and massive stimulus, we are basically getting a trial run with what UBI might look like. How’s it going so far?
I don’t think we are.
The fact that the bulk of the money is going in *exceptionally generous amounts* and *only* to unemployed people and *only* so long as they remain unemployed, means that it is neither “universal”, nor “basic”, nor even a reliable “income” since it vanishes as soon as you get a job.
Also, the old definition is for something that *replaces* the current crazy-quilt hodgepodge of subsidies, rent controls, entitlement programs, wage and benefit rules, welfare programs, loan guarantees, and so forth with one simple benefit. But nothing else changed, we just gave out pandemic handouts on top of all that.
We are paying people work-comparable amounts of money to not work, so it’s not surprising that a lot of them don’t want to work. But that’s not like UBI. I happen to think a lot of able people would choose not to work even with a “classical UBI” program, but it would be nothing compared what is going on now.
UBI will never be a replacement for the various social welfare programs. It will always and everywhere be an incremental stipend to everything else.
Shout it from the rooftops!
When will the libertarians ever figure this out?
Well, we have Joe Biden and clueless Progressives in charge. They might go Medieval on it all and try to impose wage and price controls like it’s 1349, when England passed the Statute of Laborers to cap wage increases due the Black Death pandemic.
We live(d) with some customs from these 14th century laws until at least the 1980s when recommendations were still mostly required to change jobs. And the flip side of capping wages, minimum wages and “living” wages continue to animate to this day.
“(1350) The next year the statute [of Laborers] is made more elaborate, and specifies, for common laborers, one penny a day; for mowers, carpenters, masons, tilers, and thatchers, three pence, and so on. It is curious that the relative scale is much the same as to-day: masons a little more than tilers, tilers a little more than carpenters; though unskilled labor was paid less in proportion. The same statute attempts to protect the laborer by providing that victuals shall be sold only at reasonable prices, which were apparently fixed by the mayor.
“Here, therefore, we have the much-discussed Standard Wage fixed by law, but in the interest of the employer; not a “living wage” fixed in the interest of the employee, as modem thought requires. The same statute makes it unlawful to give to able-bodied beggars, which is of a piece with the compulsory labor of the able-bodied. Now this first Statute of Laborers, which led to centuries of English law unjust to the laborers, it is interesting to note, was possibly never a valid law, for it was never agreed to by the House of Commons. However that may be, the confirming statute of 1364 was duly enacted by Parliament, and this was not in terms repealed until the year 1869, although labor leaders claim it to have been repealed by general words in the 5th Elizabeth.
“Thorold Rogers tells us that those, after all, were the happy days of the laborer when masons got four pence a day, and the Black Prince, the head of the army, only got twenty shillings sixty times as much.
p69
“(1388) The Statute of Richard II restricts laborers to their hundred and makes it compulsory for them to follow the same trade as their father after the age of twelve. The wages of both industrial and agricultural laborers are again fixed — shepherds, ten shillings a year; ploughmen, seven; women laborers, six shillings, and so on. Servants are permitted to carry bows and arrows, but not swords, and they may not play tennis or foot-ball. And here is the historical origin of the important custom of exacting recommendations: servants leaving employment are required to carry a testimonial, and none are to receive servants without such letter — the original of the blacklist.”
–Popular Law-making: A Study of the Origin, History, and Present Tendencies of Law-making by Statute
by Frederic Jesup Stimson (1910)
I hope for a couple generations of “labor shortages” in America, but I am not a fan of paying people not to work.
Macroeconomists should pay more attention to ways to repress inflation that also do not repress labor share of income (the de facto policy of the last 50 years).
Elimination of property zoning would be one step forward, and so would be the general decriminalization of push-cart and truck-vending.
Globalism works for multinationals and elites, but not employees in developed nations.
Ok, the market is supposed to find equilibrium _eventually_, but what is the time horizon? I am a software engineer at a software company and I am watching this dynamic:
1. There are more software engineering positions created every year than graduates.
2. An entire industry of coding boot camps has formed, which has changed the educational time horizon for career changers from about a year or two to a quarter. (I graduated from one.) Even universities are offering them (they subcontract).
3. Wages are higher now than when my dad was a software engineer, adjusted for inflation.
4. Companies hesitate to hire unproven engineers (college or bootcamp, but bootcamp even more so). What they really want is a *senior* developer.
If the second derivative of demand over time is high enough, you will get this dynamic. Apparently it has been high enough for quite long. If they increase the wages today, how long will it take to turn baristas into senior software developers?
Yes, I get this can’t be the case in every sector.