For as long as I can remember, eliminating unemployment was a political objective. It is, therefore, surreal to be constantly reminded of labor shortages whenever political shows are being broadcast. How did we go from high unemployment to suddenly having too many jobs? Before continuing, let’s be clear about what we are discussing. What the media may be referring to (“finding workers”) is one thing. What I mean by shortage is simply that quantity demanded exceeds quantity supplied. We can at least agree on what a shortage is.
Without any additional data, we are left to speculate on why there is a labor shortage in some industries. There is certainly anecdotal evidence concerning people who do not want to work because COVID-19 makes them feel less safe. A refusal to work outside the home by many would translate into a supply shock, a shift of labor supply to the left. There also may be an increase in quantity demanded for some products. Ultimately, all other things being equal, increased consumer demand would lead to an increased demand for workers. Whether the shortage is caused by the supply side will matter later. For now, we just need to acknowledge that a shortage can be caused by a reduced supply, an increased demand, or some combination of both.
Since pandemics that make people withdraw from certain occupations are, thankfully, rare, it’s not a surprise that it’s easier to find examples of economists writing about increased demand. The economists appear to agree with the folks on social media: “You can’t find workers. Pay your workers more.” If the demand side is contributing to the shortage, and the increased demand is not temporary, the economists don’t need to be reserved about what to do. For example,
The supply curve of labour is upward-sloping. Thus if the demand for labour expands from a position in which there is no involuntary unemployment at the going wage, the wage must rise. But the additional labour firms want cannot be obtained at the cost of that additional labour alone: the higher wage necessary to attract more labour must be paid to everyone. If the previously-prevailing wage is x and the wage necessary to get one more unit of new labour is x + h, the marginal cost of hiring an additional worker is mh + (x + h), where m is the existing labour force. (Victoria Chick, Macroeconomics After Keynes, Cambridge, Mass: MIT Press, 1983, 159)
Under the restrictive conditions mentioned above, the layman’s intuition is vindicated. The firms need to raise wages.
Indeed, in some areas, we do see wages going up. It is, however, not true that, at the same company, every wage worker has to make the same compensation. We see signs communicating the possibility of earning a “hiring bonus.” The bonus is more like a wage supplement, considering that it is only earned after the new hire continues at the company for a period of time. A retention bonus is also an alternative to raising everyone’s wage. Why doesn’t the company just raise wages like the vocal members of the public want it to? One possible answer is that it is greedy. If greediness explains the refusal to raise wages, then we have to wonder why the company is offering bonuses. Over time, the company will be spending approximately the same amount of money. My speculation is that the company believes that the supply shock is going to be a short-term phenomenon. If so, they will think long and hard about raising wages. Let’s say wages go up. If the vaccines make people less worried about COVID-19, they will return to normal employment, and, in theory, wages would be bid down toward pre-pandemic levels. In reality though, wages are “sticky downward.” If the supply shock goes in reverse, wages may be too high if they were raised during the pandemic. I know it’s appalling to say that wages could be too high at a time like this, but people in our thought experiment are less unwilling to work after vaccines tame the virus. People would no longer need a relatively high wage to get them to accept employment offers. Businesses could hire more people at a lower wage, but only if they can, in practice, lower their wage. If the businesses never raised the wage permanently to begin with, then they don’t have to worry about “sticky” wages. (Amazon, for example, paid employees a premium for a few months during the worst part of the pandemic, but everyone knew it was temporary.) The unemployed are now willing to work for wages that approximate pre-pandemic levels, but lowering wages for current employees is, at best, conceivable. They will, according to sticky wages theory, resist. For the above reasons, the obvious or intuitive solution to a labor shortage may be resisted by firms. Ending the pandemic would end the shortage also; so businesses may understandably focus on measures aimed at bringing about that outcome quickly. Businesses may indeed have to pay workers more in the short term, but paying people more and raising money wages are two different things. At the risk of being an apologist for employers, I speculate that employers have sound reasons for keeping wages stable in spite of the highly-publicized labor shortage.
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