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.
My neighbor's house was hit by a falling tree 6 weeks ago. He still waiting for the contractor to come out and fix it.
Yes, prevailing wage offers are too low, and I think Kling is exactly right- there are a lot of zombie enterprises that simply can't raise wages without having to immediately fold, and that there are a lot more of these after the COVID idiocy. Additionally, cheap roll-over financing at all levels is disappearing with the inflation pulse and rising base rates- that is also eating into wage the level of wage increases.
I actually would have chose "All of the Above", but all of the answers eventually fold back into wages being too low, or the asking rates have increased significantly, but the pithy answer is usually the logically the more correct one.
I see just as many help wanted signs on Big Box stores or chain restaurants as small businesses. I'm not sure there is a differentiator there.
There are also help wanted signs for teachers, lifeguards, anything really.
If there is a labor shortage, it doesn't seem to differentiate by firm type.
I'm not sure there is any "small business retail" left out there. I live in a small town with a Main Street, and there aren't any small retail businesses. There are boutique retail with say antiques, but they are selling something the big box doesn't sell. There are individual restaurants, but they are delivering an in person local good not really competing with Amazon.
I was recently on vacation in Hawaii, which seems to have really been hit hard by service sector labor shortages. Malls in areas with very large, high-spending tourist areas had significant tenant vacancies, despite large numbers of customers wandering around.
The places that were open had reduced hours and – it seems – increased pricing. I mean, the prices at restaurants were truly incredible. I live in the Bay Area and I was still shocked, which wasn’t something I’d experienced before. The reduced hours seemed to translate to longer lines, which might lead to lost sales but could offer some optimization of sales per hour open.
I saw, interestingly, one small pizza place that had no front-of-house staff. There was just an ordering kiosk, but no people to take orders. When your pizza was ready, someone – presumably the chef? – would come out, yell a name, leave the pizza in a box on the counter, and go back to make more pizzas.
So I maybe don’t agree with the “walking dead” thesis. There are (maybe) some inefficiencies or optimizations that people might employ to reduce costs and increase revenue. Like every other part of the economy, small business are experiencing the after-effects of our massive Covid-inspired experimental shutdown and restart of the economy.
Similar problems getting staff across the economy is affecting UK too.
“ Between May and July of this year, according to the Office for National Statistics, there were over 953,000 job vacancies waiting to be filled. This is the highest number on record.”
For example: the NHS is understaffed; leisure & entertainment; airports/airlines are having great difficulty recruiting ground staff. These are big employers. Employees who were laid off during CoVid have not returned; nobody know where they went or why.
I suppose that I’m nitpicking, but it seems like there are multiple causes. Retirement of baby boomers is one cause; the delay in firms adjusting to new labor prices is another. Don’t forget that periods of varying inflation (either general or labor-specific prices) make it harder for a form to determine what price they need to offer, because it makes more difficult the process of comparing data gathered at different times. Doing less is a common response to uncertainty.
I must admit I got the wrong answer, Professor Kling. Of course, the immediate reason for any shortage or glut is that prices are "wrong" and don't clear markets for some reason. I read the question to mean "What was the underlying reason for the shortage to arise?" Assuming the market for labor had been in some sort of equilibrium in the recent past, the underlying reason it was knocked out of equilibrium was a shift in the "labor supply curve" because of answers (a), (b) and (c), so I picked answer (d), "All of the above." Once the labor supply curve shifted, prices - that is wages and salaries - needed to adjust upward but failed to do so because they are "sticky" for the reasons Arnold described.
Professor Kling, can I still get credit for my answer? I'm really hoping to work as an economist someday, i.e., now.
Before I ended my hatchery business in 2005, I noted that I paid well under-market for my labor, but we treated them well and they loved their work. Pay is only part of a job.
As one young man said in an annual review: " there are two wages you get paid, one in $/clock hour and one in $/person hour and if you have to watch the clock, you never make minimum wage on the second measure".
Shortages are caused by shifts in demand or supply such that quantity demanded is in excess of quantity supplied. Shortages are typically corrected by price increasing until quantity supplied and demanded are again in balance. Persistent shortages are evidence of prices not adjusting properly, but that is not the cause of the shortage, but rather the reason it is not being corrected.
Small retail businesses need to cultivate lifelong relationships with their customers. Covid hit that hard. Their margins are slim so paying employees more only works if their customers understand what is going on (with overhead and market changes) and agree to pay higher prices. Amazon et al can not compete with deep longterm customer relationships. I'll gladly pay more if I LOVE a business. A 'walking dead' business needs to focus on customer relationships. Maybe even post their spread sheets! Encourage their customers to feel convivial. Then they can raise prices.
...And yes, they need to think about what they or offering employees in addition to wages. Working can be a fun, social, learning experience.
My neighbor was managing two restaurants. During Covid he built a pizza truck and now makes 6-8 times more money. My other neighbor has a contracting landscaping biz. He works solo and has friends in the same business to cooperate on bigger jobs, business is booming. Cut overhead, build longterm relationships! Retail is hollowing out. Only conviviality can save it.
The causes of the dramatic increases of the equilibrium price of labor are the big recent supply shocks as pointed out in a) COVID, b) Accelerated Baby Boomer retirements, c) Higher stress of public facing jobs. Roughly a 7.5% increase in real wages from 3Q 2019 to 3Q 2020. Falling 7.5% in the two years since.
The unwillingness to pay market rates or, as you correctly point out, inability to remain profitable if you do, has lead to the continuously large number of unfilled positions.
My speculative answer would be that real wages are hurt by the high inflation. But this means that workers can be paid less in real terms. They can want to hire more at these levels. Firms don't want to increase pay for everyone if they don't have to and they don't necessarily have to because people don't want to leave their current jobs. So, they keep it at a low level but have trouble hiring. There's probably issues with this theory.
Speaking as an economics graduate who subsequently went into tech, I suspect wages remain sticky due to a combination of automation and available marginal labour supply with fractured bargaining power.
The pandemic has shown that a lot of jobs have been shown to be less essential than they were perceived to be prior to the shock. Consider that large firms like fast food chains and retail survives and even thrived during the pandemic with a much reduced or irregular labour supply, supplemented by online automation eg. via Shopify, Uber Eats and DoorDash.
I think these firms are still adjusting to that new production mix, which weights technological factors more heavily. How many people do you need when the remaining staff are focused on the cooking, packaging, and hand-off of the food or items? I think firms are still struggling to answer that question; they hope to understand their customers post-pandemic preferences for online to in-person ordering.
We consistently underestimated how sticky decisions are in firms. Even if technological factors have shifted to compensate for lower levels of labour, it’s a long process for a firm to understand that and revise it’s perceived required labour level.
Which can explain why firms are not raising prices: clearly they are still getting along with the limited labour levels available at their provided wages. It’s probably a sticky perception that they need the higher pre-pandemic labour levels.
Even if that’s not true, then the large firm is still managing to claim marginal labour to meet their needs. There’s very little concerted efforts in service role jobs to unionize and gain collective bargaining power.
Why not raise prices? Because they don’t actually need higher labour levels: they just think they do because of sticky preconceptions and or because of uncertainty about their customer’s digital to in-person shopping preferences.
That is my theory for large firms. I agree with you Arnold, that smaller firms may already be dead, they just don’t know it yet.
This seems like a too much of an economist answer. If there was a grain shortage and people were starving, if you told me the shortage was caused by prices not adjusting, I wouldn’t take that seriously.
Raising wages will certainly get rid of the help wanted signs, either by inducing people to work or by driving firms out of business. But the problem isn’t the help wanted signs. (This reminds me of my proposed solution for the problem of there being people without health insurance, back when that was an important topic: simply execute anyone without health insurance. There wouldn’t be anyone without health insurance anymore. But then I feel like my solution misunderstood what the real problem was…)
"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.
My neighbor's house was hit by a falling tree 6 weeks ago. He still waiting for the contractor to come out and fix it.
Yes, prevailing wage offers are too low, and I think Kling is exactly right- there are a lot of zombie enterprises that simply can't raise wages without having to immediately fold, and that there are a lot more of these after the COVID idiocy. Additionally, cheap roll-over financing at all levels is disappearing with the inflation pulse and rising base rates- that is also eating into wage the level of wage increases.
I actually would have chose "All of the Above", but all of the answers eventually fold back into wages being too low, or the asking rates have increased significantly, but the pithy answer is usually the logically the more correct one.
I see just as many help wanted signs on Big Box stores or chain restaurants as small businesses. I'm not sure there is a differentiator there.
There are also help wanted signs for teachers, lifeguards, anything really.
If there is a labor shortage, it doesn't seem to differentiate by firm type.
I'm not sure there is any "small business retail" left out there. I live in a small town with a Main Street, and there aren't any small retail businesses. There are boutique retail with say antiques, but they are selling something the big box doesn't sell. There are individual restaurants, but they are delivering an in person local good not really competing with Amazon.
I was recently on vacation in Hawaii, which seems to have really been hit hard by service sector labor shortages. Malls in areas with very large, high-spending tourist areas had significant tenant vacancies, despite large numbers of customers wandering around.
The places that were open had reduced hours and – it seems – increased pricing. I mean, the prices at restaurants were truly incredible. I live in the Bay Area and I was still shocked, which wasn’t something I’d experienced before. The reduced hours seemed to translate to longer lines, which might lead to lost sales but could offer some optimization of sales per hour open.
I saw, interestingly, one small pizza place that had no front-of-house staff. There was just an ordering kiosk, but no people to take orders. When your pizza was ready, someone – presumably the chef? – would come out, yell a name, leave the pizza in a box on the counter, and go back to make more pizzas.
So I maybe don’t agree with the “walking dead” thesis. There are (maybe) some inefficiencies or optimizations that people might employ to reduce costs and increase revenue. Like every other part of the economy, small business are experiencing the after-effects of our massive Covid-inspired experimental shutdown and restart of the economy.
Similar problems getting staff across the economy is affecting UK too.
“ Between May and July of this year, according to the Office for National Statistics, there were over 953,000 job vacancies waiting to be filled. This is the highest number on record.”
For example: the NHS is understaffed; leisure & entertainment; airports/airlines are having great difficulty recruiting ground staff. These are big employers. Employees who were laid off during CoVid have not returned; nobody know where they went or why.
It doesn’t seem to be linked to too low wages.
I suppose that I’m nitpicking, but it seems like there are multiple causes. Retirement of baby boomers is one cause; the delay in firms adjusting to new labor prices is another. Don’t forget that periods of varying inflation (either general or labor-specific prices) make it harder for a form to determine what price they need to offer, because it makes more difficult the process of comparing data gathered at different times. Doing less is a common response to uncertainty.
I must admit I got the wrong answer, Professor Kling. Of course, the immediate reason for any shortage or glut is that prices are "wrong" and don't clear markets for some reason. I read the question to mean "What was the underlying reason for the shortage to arise?" Assuming the market for labor had been in some sort of equilibrium in the recent past, the underlying reason it was knocked out of equilibrium was a shift in the "labor supply curve" because of answers (a), (b) and (c), so I picked answer (d), "All of the above." Once the labor supply curve shifted, prices - that is wages and salaries - needed to adjust upward but failed to do so because they are "sticky" for the reasons Arnold described.
Professor Kling, can I still get credit for my answer? I'm really hoping to work as an economist someday, i.e., now.
Before I ended my hatchery business in 2005, I noted that I paid well under-market for my labor, but we treated them well and they loved their work. Pay is only part of a job.
As one young man said in an annual review: " there are two wages you get paid, one in $/clock hour and one in $/person hour and if you have to watch the clock, you never make minimum wage on the second measure".
Alright, I feel like I am making this argument a lot, so I wrote up a longer responses about the causes of shortages vs the market corrective for shortages, here: https://dochammer.substack.com/p/contra-kling-on-price-adjustments?sd=pf
Summary:
Shortages are caused by shifts in demand or supply such that quantity demanded is in excess of quantity supplied. Shortages are typically corrected by price increasing until quantity supplied and demanded are again in balance. Persistent shortages are evidence of prices not adjusting properly, but that is not the cause of the shortage, but rather the reason it is not being corrected.
Small retail businesses need to cultivate lifelong relationships with their customers. Covid hit that hard. Their margins are slim so paying employees more only works if their customers understand what is going on (with overhead and market changes) and agree to pay higher prices. Amazon et al can not compete with deep longterm customer relationships. I'll gladly pay more if I LOVE a business. A 'walking dead' business needs to focus on customer relationships. Maybe even post their spread sheets! Encourage their customers to feel convivial. Then they can raise prices.
...And yes, they need to think about what they or offering employees in addition to wages. Working can be a fun, social, learning experience.
My neighbor was managing two restaurants. During Covid he built a pizza truck and now makes 6-8 times more money. My other neighbor has a contracting landscaping biz. He works solo and has friends in the same business to cooperate on bigger jobs, business is booming. Cut overhead, build longterm relationships! Retail is hollowing out. Only conviviality can save it.
Kind of a false dichotomy here. A bit more nuance than "none of the above" because price....
https://fred.stlouisfed.org/series/LES1252881900Q
The causes of the dramatic increases of the equilibrium price of labor are the big recent supply shocks as pointed out in a) COVID, b) Accelerated Baby Boomer retirements, c) Higher stress of public facing jobs. Roughly a 7.5% increase in real wages from 3Q 2019 to 3Q 2020. Falling 7.5% in the two years since.
The unwillingness to pay market rates or, as you correctly point out, inability to remain profitable if you do, has lead to the continuously large number of unfilled positions.
My speculative answer would be that real wages are hurt by the high inflation. But this means that workers can be paid less in real terms. They can want to hire more at these levels. Firms don't want to increase pay for everyone if they don't have to and they don't necessarily have to because people don't want to leave their current jobs. So, they keep it at a low level but have trouble hiring. There's probably issues with this theory.
Speaking as an economics graduate who subsequently went into tech, I suspect wages remain sticky due to a combination of automation and available marginal labour supply with fractured bargaining power.
The pandemic has shown that a lot of jobs have been shown to be less essential than they were perceived to be prior to the shock. Consider that large firms like fast food chains and retail survives and even thrived during the pandemic with a much reduced or irregular labour supply, supplemented by online automation eg. via Shopify, Uber Eats and DoorDash.
I think these firms are still adjusting to that new production mix, which weights technological factors more heavily. How many people do you need when the remaining staff are focused on the cooking, packaging, and hand-off of the food or items? I think firms are still struggling to answer that question; they hope to understand their customers post-pandemic preferences for online to in-person ordering.
We consistently underestimated how sticky decisions are in firms. Even if technological factors have shifted to compensate for lower levels of labour, it’s a long process for a firm to understand that and revise it’s perceived required labour level.
Which can explain why firms are not raising prices: clearly they are still getting along with the limited labour levels available at their provided wages. It’s probably a sticky perception that they need the higher pre-pandemic labour levels.
Even if that’s not true, then the large firm is still managing to claim marginal labour to meet their needs. There’s very little concerted efforts in service role jobs to unionize and gain collective bargaining power.
Why not raise prices? Because they don’t actually need higher labour levels: they just think they do because of sticky preconceptions and or because of uncertainty about their customer’s digital to in-person shopping preferences.
That is my theory for large firms. I agree with you Arnold, that smaller firms may already be dead, they just don’t know it yet.
How long can a small business be part of the walking dead? It's not like they're too big too fail.
This seems like a too much of an economist answer. If there was a grain shortage and people were starving, if you told me the shortage was caused by prices not adjusting, I wouldn’t take that seriously.
Raising wages will certainly get rid of the help wanted signs, either by inducing people to work or by driving firms out of business. But the problem isn’t the help wanted signs. (This reminds me of my proposed solution for the problem of there being people without health insurance, back when that was an important topic: simply execute anyone without health insurance. There wouldn’t be anyone without health insurance anymore. But then I feel like my solution misunderstood what the real problem was…)