Test your economic knowledge
explain the current labor market
We are seeing businesses struggle to find workers. Many people report seeing “help wanted” signs all over town. What explains this?
a) COVID’s effect on labor supply
b) retirements of the baby boom generation
c) many jobs in the service sector have become more stressful
d) all of the above
e) none of the above
Think of your answer. Then read Walter Block’s post, if you haven’t already. He writes,
If you ask a good freshman student in Economics 101 what is the cause of a shortage, you will get a quick answer, almost but not quite by rote: demand is greater than supply and for some reason, price has not risen so as to stop the shortage. That is it. That is it in a nutshell. Not much more need be said: shortages are caused by prices being too low. End of story.
This semi-automatic answer emanating from basic economics, however, has eluded a bunch of economists who really ought to know better. They ought to know better since they have advanced degrees in this subject.
One piece of jargon in the field of education is “knowledge transfer.” It is one thing to get a standard problem correct on a test. But can you apply what you supposedly learned in a situation that is not as obvious as a test problem?
Sadly, we train Ph.D economists sophisticated methods for teasing tease results out of “big data” but allow them to forget freshman economics. So nobody blurts out “firms are offering wages that are too low” to explain the “labor shortage.” But that is what would occur to you on a freshman econ test, where you would correctly pick (e).
Block speculates that firms are afraid that if they raise wages now, then they won’t be able to lower them later. That is one possibility.
I suspect that many small businesses are “walking dead.” The wage that they need to pay in order to attract enough workers is higher than what they can afford to pay in order to earn a profit. If this situation persists, at some point they will have to fold. For now, they hold on to the hope that they can fill their vacancies without having to pay workers what the market currently would require.
Globalization and computerization have really altered the landscape for small business. Small retailers are up against Wal-Mart and Amazon. But why now would there be so many “walking dead?” My hypothesis is that COVID accelerated households’ use of Internet shopping, and some of the resulting shakeout is still to come.
I would love to see a study of the small business sector in the United States, comparing its structure today to what prevailed around 1985. My impression is that small independent retail establishments are disappearing. But small service contractors are everywhere—go to an affluent neighborhood and count the landscaping trucks.
"Help Wanted" signs are cheap.
And we don't apply the same scrutiny to employer data as we do to employee data. If the BLS calls up a person and they say something like "sure, I'd like a job, but I'm not looking very hard because I think most of the jobs I could get aren't worth it" that person is considered "out of the labor force".
If the BLS calls up an employer, they say "how many job openings do you have" and the employer says "Six!" (or whatever) and are credulously taken at their word. Because why would a firm go through the expense of advertising a position they don't need to fill?
Well, lots of reasons. The marginal cost of keeping your "help wanted" sign out there is approaching zero. It gives you options. If a sufficiently attractive worker comes along, you are in position to snap them up, and your operation is probably flexible enough to do that. And if they don't, you're getting by ok as it is.
Short answer is that just as lots of unemployed aren't looking that hard for jobs, lots of employers aren't looking that hard for workers. That's certainly not the whole story, but I suspect it makes a lot of economic sense for an employer to always have a line in the pond.
I believe you are making the mistake of a monocausal answer. Prices (wages) going up is usually the solution to a shortage, but the lack not necessarily the cause, just as antibiotics are usually the solution to an infection, but the lack is not the cause.
Long term shortages are the results of prices not adjusting, sure, because we expect prices to adjust. What is causing demand to outstrip supply so much is a good question as well, especially when you go from roughly equilibrium to a sudden shortage. It is probably worth looking to see if the shift away from a relatively stable place was due to natural causes or something like legislation that we could just stop doing.
If the government were to sharply limit oil production such that there was a shortage of oil, prices would increase until people stopped using as much. That would still be bad, and people would rightly ask "why isn't there as much oil as before?" Price changes are not the only reason quantity supplied changes; if the supply curve has shifted negatively we should be asking if those shifts had to happen, or are they self inflicted.
It rather seems like you are ignoring all of that, Dr. Kling.