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There is No Shortage of Labor

Summary:
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

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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 alread expired in some states) 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.

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