It is an interesting phenomenon that a first-rate financial newspaper can, without adding a big smiley, run a major title like yesterday’s: “US Economy Added 428,000 Jobs in April Despite Worker Shortages.” Imagine the number of new jobs created if there were no “shortage”!
At least in the economic sense of the word, there is no shortage of labor more than is a shortage of petroleum, ammo, or diamonds: these things are just expensive and more expensive than they have been in the recent past. One can define “shortage” as one wants, but if is defined as “high price” or “increasing price,” we need another word for “unavailable at any market-determined price,” which is how economics defines it.
By promoting the confusion between market unavailability and availability at a price that many deem too high to justify buying, one renounces the possibility of useful analysis.
That job openings look larger than job takers at a wage rate lower than the market-clearing rate is not, in itself, a useful bit of information. For example, I have a permanent job opening for a Ph.D. research assistant at $5 an hour. That there is no job taker does not mean that there is a labor shortage; it just mean that I don’t need a research assistant at the price these guys and gals are fetching on the labor market.
We may sympathize with Fed chairman Jay Powell’s efforts to continue his crash course in economics since he was nominated by president Donald Trump, but this should not prevent us from realizing that a declaration like he just made does not make much economic sense (quoting the same Financial Times report):
Labour demand is very strong, and while labour force participation has increased somewhat, labour supply remains subdued.
A “subdued” labor supply is not a technical expression, so let’s try to see what if means. That these slaves don’t work as much as political authorities would like? Probably not. Perhaps Mr. Powell is just trying to dumb down for his listeners the idea that the supply (curve) of labor is not elastic enough and that it would be so nice, it would make employers so happy, if more people were willing to jump in the labor force for wages that they consider wouldn’t compensate for their lost leisure. It would be so good if workers were not such wage gougers! Or perhaps it was simply the way some in the Fed’s army of economists tried to it dumb down for their boss?
If there is a market disequilibrium, it would more likely be a surplus of labor created by minimum wages and coercive union privileges, both of which prevent less productive workers from from competitively bidding their own wages down in order to find jobs. But note that the growth in real market wages that accompanied higher labor demand in the post-pandemic recovery (before inflation rose its ugly head) imply that any labor surplus has been reduced, which the low unemployment rate confirms.
Inflation, a product of the new money created to partly finance the federal government’s recent deficits, is a true but different problem. As the Bureau of Labor Statistics notes, “over the past 12 months, average hourly earnings have increased by 5.5 percent.” Even if we add benefits, the increase in remuneration is probably lower, and certainly not much higher, than the current estimated increase in the general price level (that is, the inflation rate), depending on which index is used. Which suggests another problem in the “shortage” narrative: if the hypothesized temporary gap between quantity demanded and quantity supplied of labor existed, there would be strong upward pressure on real wages. Without such increases in real wages, no wonder that employers have problems attracting wage-gouging toilers. Perhaps the lack of strong increase in (average) real wages just shows a temporary lag, assuming a recession is not on the horizon.
One way or another, it seems pretty clear that, at least in the overall labor market, there is no more shortage than in any other relatively free, or not too unfree, market.
READER COMMENTS
Matthias
May 7 2022 at 8:50pm
You are clearing up so many misconceptions here, but then you suggest that the budget deficit causes inflation?
Pierre Lemieux
May 7 2022 at 11:04pm
Matthias: You are right that this sentence of mine was very badly formulated (and I will correct it after acknowledging your point). Deficit financing does not, of course, create inflation; it does only if, and to the extent that, the financing comes from the creation of new money. From all we know, there has been much of that since Covid. Jeff Hummel suggested to me that almost a quarter of federal expenditures in the two years through September 2021 was financed by money creation. Another, rough, calculation: between February 2020 and late 2021, the money stock (measured with M2) increased by 41%.
Craig
May 8 2022 at 12:39am
“As the Bureau of Labor Statistics notes, “over the past 12 months, average hourly earnings have increased by 5.5 percent.” Even if we add benefits, the increase in remuneration is probably lower, and certainly not much higher, than the current estimated increase in the general price level (that is, the inflation rate), depending on which index is used.”
The BLS also puts out a real wages report as well. https://www.bls.gov/news.release/realer.nr0.htm
First comes jobs report for the month where we get the nominal M/M increase in wages, then we get the inflation report, then the two combined can give you the M/M REAL.
Last month’s report shows: “Real average hourly earnings decreased 2.7 percent, seasonally adjusted, from March 2021 to March 2022.”
If we take the 5.5% and compare to the current Y/Y CPI, which is one month off step, obviously that is -3%
This month’s CPI read might be down actually. The PCI is heading into a period when the current month’s M/M rate is taking the place of a pretty high number from 2021 (.9), so even if the CPI comes in at .8, the Y/Y will mathematically dip. If its another 1.2% then naturally the Y/Y will trend up.
“Which suggests another problem in the “shortage” narrative: if the hypothesized temporary gap between quantity demanded and quantity supplied of labor existed, there would be strong upward pressure on real wages.”
Indeed, that’s the astute observation.
Where I now stand confused though is that productivity came in with a -7.5% number? https://www.bls.gov/news.release/prod2.nr0.htm
Pierre Lemieux
May 8 2022 at 12:55pm
Craig: Isn’t the answer to your last question in at the beginning of the BLS release:
Recall that productivity statistics are quarterly and that Q1 saw a reduction of GDP. Productivity statistics are not the most straightforward to interpret even without that.
Craig
May 8 2022 at 2:34pm
Well, yes, that’s the reason for the computational result, right? Way I see it it does seem incongruent, ie first quarter all months see job gains as the quarter sees negative GDP growth? In a certain superficial sense it would suggest the people hired in the first quarter were providing a negative disutility to the businesses they were working for!
Dylan
May 8 2022 at 9:29am
Doesn’t this just imply that labor force participation remains low by historical standards and is still roughly 1.5 percentage points below where we were pre-pandemic? Despite the fact that wages have risen fairly sharply at a rate that many would have assumed would have coaxed more individuals back to the labor market?
Pierre Lemieux
May 8 2022 at 12:25pm
Dylan: It could be. But labor supply is a function of other factors than just the participation rate. For example, workers may be willing to offer more hours at any given hourly remuneration rate. Or they may have acquired a heightened taste for leisure during the pandemic.
nobody.really
May 9 2022 at 11:56am
Well … yeah. That’s the inference I draw when I read these stories about “labor shortages.” The wording may lack precision, but the stories arguably refer to a real phenomenon: A shift in tastes and preferences about labor and leisure. I understand that many economists take tastes and preferences as given, but to me this apparent shift cries out for an explanation. Perhaps that explanation must be found beyond the confines of economics.
If we can’t marshal an explanation, then I think we need to fall back to the theory that the apparent shortage reflects a decline in real compensation and/or a contraction of the labor supply due to deaths/disability/loss of public school daycare/increased immigration restrictions.
Pierre Lemieux
May 10 2022 at 10:38am
nobody.really: But this is not the point of my argument. For whatever reason the demand curve shifted (since the recovery), or the supply shifted (although it was compensated by a larger shift in the supply curve: see the argument below), there can be no shortage if the price is flexible. Is there a shortage of diamonds?
Cobey Williamson
May 8 2022 at 10:26am
Inflation has nothing to do with money and everything to do with production.
Mark Brophy
May 8 2022 at 11:38am
Inflation is an increase in the money supply.
Pierre Lemieux
May 8 2022 at 12:13pm
Mark: There is a good argument, thought, for not giving the same label to both the cause and the effect. If one defines gravity as “falling on the ground,” one cannot explains by gravity why he fell on the ground.
Craig
May 8 2022 at 3:07pm
Why worry about government debt at all then? Just QE away all of the debt, after all, if inflation has nothing to do with money, who cares?
Pierre Lemieux
May 8 2022 at 12:07pm
Cobey: Interesting question, but what is the question exactly? Suppose production (“GDP”) decreases by 5% annually, year after year, ceteris paribus. The measured annual inflation rate would seem to be 5%. Is this what you mean? Or do you mean that an increase of the money supply like in Spain in the 16th century (because of gold imports from the New World) will not generate inflation? Or do you, incoherently, mean both?
johnson85
May 9 2022 at 10:54am
I interpret “labor shortage” as just meaning, the supply curve of labor has shifted (or become more inelastic) and the market hasn’t figured out the new equilibrium.
We had the supply restricted by excess deaths and then also changed by helicoptering money in and then also schools becoming unreliable daycare providers. Producers don’t know to what extent they can just raise prices so are understandably hesitant to just raise wages to get more labor.
That’s not a definition that is helpful for doing quantitative analysis, but I think it’s a useful enough concept, even if it’s not what economists define “shortage” as.
Pierre Lemieux
May 9 2022 at 1:11pm
Johnson85: If, since the short 2020 recession, wages (remuneration) have increased (at least before inflation took off) and employment (=quantity supplied of labor=quantity demanded of labor) has increased, there cannot have been a decrease in labor supply (or in elasticity), or else its effect has been more than cancelled by increased demand for labor.
Johnson85
May 10 2022 at 10:12am
Employment has not increased? We’re still down about 1 million on the employment front. The jobs are still out there, almost always at a higher nominal wage (and at least what I’m seeing, a higher real wage for jobs at the lower end of the pay scale although that’s obviously going to be case by case), but labor supply isn’t meeting it.
Yes, there are people on the sideline that for the right wage, would come back to work, but while it may be almost impossible to have a shortage of anything under economists definition, I think most people understand “there isn’t as much labor available as there was 26 months ago, even after offering higher pay, as a labor shortage.
And again, I think that is a useful concept, because it leads to the next question of “how much of the shortage is due to excess deaths from covid? From baby boomers aging out/retiring? From mothers (and some fathers) deciding that they want to be stay at home parents after getting a taste of it? That concept may not plug neatly into an economic model, but I think it does help you figure something out about the world and in some ways is more useful than saying “The market clearing wage has risen and as a result employment is down”.
Jon Murphy
May 10 2022 at 10:23am
Right, but to Pierre’s point, if high wages were driven solely by a contraction in the labor supply curve, rather than an increase in demand (possibly combined with a decline in supply), then we wouldn’t have added some 20 million workers.
Johnson85
May 10 2022 at 11:20am
I don’t think anybody has claimed that the increased wages were solely due to a shortage?
Certainly a lot of it was driven by workers being “missing” after the pandemic started, for whatever reason. We gave entry level workers a 16% nominal wage increase not because we were doing more work or because there was more demand for our work, but simply because we had work to do and that’s what it took to get workers. The “missing” workers we were looking for were almost certainly enjoying some government funded leisure, not pursuing more attractive options created by more demand elsewhere in the economy, but I can’t say how true this would have been across the economy.
But the point remains that while it is fine to claim there was no shortage in the economic sense (the way Pierre is using it there can almost never be a shortage of anything, except for government created shortages from anti-gouging laws and very temporary shortages where even offering a 1,000,000% premium wouldn’t result in somebody figuring out how to get you whatever is in short supply), most people still have some understanding of what is meant when lay people are referring to a labor shortage. For whatever combination of reasons, there is less employment now even though pay has generally gone up. That is relevant information and leads to questions/inquiry that are helpful. Just saying, if you raise pay enough, people will enter/re-enter the workforce is less helpful.
It is probably important to most employers to know whether their would-be employees are still coasting off government benefits, are dead, are staying home with kids, have gone to more attractive industries/jobs, etc. Raising sticky wages may be a bad idea if there is more labor likely to enter the workforce as benefits/savings are spent and/or schools become more reliable day care providers (not saying I think either of those are major factors at this point, but there is a question). It may be necessary in other situations.
Jon Murphy
May 10 2022 at 11:28am
You did? At least according to your definition of shortage:
Johnson85
May 10 2022 at 11:57am
“You did? At least according to your definition of shortage:
What in that definition would imply that is the only thing going on? When you are talking about something as general as “labor”, why would you ever think anybody intended to claim only one thing could possibly be going on at a time?
Pierre Lemieux
May 10 2022 at 10:56am
As emphasized, I am speaking of the period of “the post-pandemic recovery.” Tue question is, Has a “labor shortage” developed with the growth in the demand for labor that was then observed?
Johnson85
May 10 2022 at 11:49am
I don’t know if there is an english as a second language problem or if it is that you are taking care to use very precise language and my lack of training in economics is causing me to get lost,
But I would say when the pandemic hit, the supply curve for labor shifted leftward (and maybe got more inelastic?) for a combination of reasons (deaths, staying at home because of extra gov’t benefits, staying at home because of excess savings from lack of options for disposable income; staying at home because of lack of reliable daycare; staying at home because of fear of catching covid, etc.). I am assuming that the demand for labor shifted at the same time because of government lockdown and individual responses a to the pandemic, but that it bounced back fairly quickly and over time, has at least ended up where it was before the pandemic (i.e., we would still employ the same number of people at the wage levels at the beginning of the pandemic).
At that time, the equilibrium for labor emerged and there was less labor supplied and a higher price for it. Since that time, producers have been steadily raising pay without being able to entice enough labor to reach prepandemic levels. So no, a labor shortage hasn’t “developed with the growth in demand” since the pandemic. Whatever caused the shift in the supply curve for labor happened at the beginning of the pandemic. Maybe some of those factors have been reduced (excess gov’t benefits, savings, fear of covid), but the supply curve is still to the left of where it was before, for whatever reason. Growth in demand beyond the level of what was present at the beginning of the pandemic may be making it harder for employers/the market to catch up to an equilibrium wage, but if demand was just at the level it was pre-pandemic, we’d still have less employment than we had at the beginning of the pandemic because of the worker “shortage”.
nobody.really
May 9 2022 at 5:09pm
Lemieux beats MarketWatch (and the Fed) to the punch: “Fed official says he doesn’t buy the ‘Great Resignation’ — and says employers ‘always say’ there’s a labor shortage to avoid paying higher wages.”
Pierre Lemieux
May 10 2022 at 10:49am
Thanks for the link. The relative price changes that Kashkari is (also) speaking about is how a free-market economy allocates resources towards most pressing and changing demand. That’s the crucial role of prices.
Thomas Lee Hutcheson
May 11 2022 at 8:12am
I guess “subdued” means that employment is still not back to where it would have been without COVID.
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