The Labor-Shortage Myth
Today’s jobs report from the Bureau of Labor Statistics shows the unemployment rate continuing to hold close to its lowest level in 70 years, despite a slight uptick last month. This might seem like good news, but it has two groups of Americans deeply troubled. One is the business community, which counts on a surplus of available workers to keep wages down. The other, unfortunately, is mainstream economists—and the policy makers who listen to them.
Federal Reserve Chair Jerome Powell has linked low unemployment to high inflation, publicly discussing the need to restore “balance” to the labor market—meaning increase unemployment and suppress wage growth—to tame consumer prices. A director at the American Enterprise Institute, a corporate-friendly think tank, recently called for “a pretty big increase in the unemployment rate.” Republicans in several states have introduced legislation to loosen child-labor restrictions as a way to expand the labor supply.
The Biden administration, meanwhile, seems to agree that low unemployment poses a problem, and to see immigration as an answer. In December, Axios reported that Biden’s “top economic aides are concerned that the lack of immigrant workers is leading to labor shortages.” Last month, Secretary of Homeland Security Alejandro Mayorkas called for immigration reform on the grounds that “there are businesses around this country that are desperate for workers” and “desperate workers in foreign countries that are looking for jobs in the United States.” Apparently our own workers aren’t desperate enough.
[Derek Thompson: What does the shocking unemployment report really mean?]
To the average person, opposition to low unemployment and rising wages is deeply counterintuitive. But it has long been central to economic policy. As Glenn Hubbard, a Columbia University economist who chaired George W. Bush’s Council of Economic Advisers, has written, “Since the dawn of their discipline, economists have understood the goal of the economic system to be optimizing consumption—producing goods and services as cheaply as possible and getting them in the hands of individuals who want them to improve living conditions.” In this way of thinking, labor is just another commodity, like wood or oil, and Americans are best off when it is plentiful and cheap.
American public policy has largely managed to keep things that way. Over the past 50 years, as both parties supported the entry of millions of unskilled immigrants and the offshoring of entire industries, America’s per capita gross domestic product more than doubled after adjusting for inflation. Productivity of labor rose by a similar amount, and corporate profits per capita nearly tripled. Yet over the same time period, the average inflation-adjusted hourly earnings of the typical worker rose by less than 1 percent.
In the coronavirus pandemic’s aftermath, for the first time in a long time, many employers are discovering that they can’t fill jobs at the low wages they’re accustomed to offering. “We hear from businesses every day that the worker shortage is their top challenge,” Neil Bradley, chief policy officer at U.S. Chamber of Commerce, said last May. This is the precise circumstance under which wages might finally rise. Instead, the business community is looking to government to get them out of a jam, and leaders on both sides of the aisle seem only too eager to help.
This is a grave mistake—politically, economically, and morally. If employers are struggling to find workers, they should offer better pay and conditions. If that comes at the expense of some profits, or requires some prices to rise, well, that’s how markets are supposed to work. In most other contexts, capitalism’s proponents celebrate how the market creates incentives for businesses to solve problems. In that respect, a labor shortage is a great problem to have. Only by challenging employers to improve job quality and boost productivity will we find out what the market’s awesome power can achieve for American workers and their families.
The notion of a “labor shortage” in a market economy presents something of a puzzle. The basic principle of supply and demand suggests that, if employers can’t find enough workers, they’ll simply have to offer higher wages or better working conditions. Perhaps in the face of a sudden shock—say, in the middle of a pandemic—a temporary shortage might arise. The labor supply could shrink faster than businesses could adjust. But that’s not the situation today. Labor-force participation has returned to 2019 levels; real wages have been falling after a brief bump early in the pandemic. When employers say there isn’t enough labor, what they really mean is that they can’t find enough people willing to work under the terms that they want to offer—and that they’re doing a poor job increasing productivity with the workers they have.
The irony is that the most fervent free-market economists and business leaders are often the first to complain about labor shortages and overheated labor markets. So they need some explanation for why supply and demand suddenly don’t apply. Thus the trope of “jobs Americans won’t do.” The idea is that wages are determined by some objective measure of productivity. You get paid what you’re worth to your employer, no more, no less. On this theory, certain jobs—like busing tables in a fast-food restaurant or picking crops in a hot field—just don’t command wages high enough for most Americans to want to do them.
In truth, there’s no such thing as objectively higher- or lower-value jobs. Those determinations are set by market conditions, which are in turn shaped by public policy. There is, therefore, a circularity to the dynamic: Wages are influenced by judgments about what a given job should be worth and thus whether a purported shortage should be remedied by policy makers. Although it’s tempting to say that the market has decided that software development pays $61 an hour while picking lettuce pays $16, that observation falters on the fact that farm owners can’t actually find workers at that low wage. (If you offered computer programmers $16 an hour and made them work in the hot sun, you would have trouble finding enough of them too.) That’s why the federal government created an H-2A agricultural-guest-worker program that has swelled from fewer than 50,000 annual visas in 2005 to more than 250,000 in 2021.
No one thinks twice when professionals in office buildings see their wages rise, or when employers have to woo them with free meals and comfy chairs. Only when lower-wage workers see gains, even briefly, do we suddenly have an economic crisis on our hands.
[Annie Lowrey: Why everyone is so mad about the economy]
The sober economists have an explanation for this too: inflation. Sure, everyone wants to see low-wage workers do better, in the abstract. But if we start paying people too much, employers will have to raise prices to cover rising wages, and we’ll get inflation. In the argot of the Federal Reserve, wage growth must be kept “consistent” with its target 2 percent inflation rate.
The first problem with this reaction is that, as an empirical matter, tight labor markets are not necessarily associated with high inflation. In the late 1970s, as inflation was surging, the unemployment rate was high too: 5 to 6 percent. Throughout both the late 1990s and the late 2010s, an unemployment rate below 4 percent coincided with low inflation. Over the past year, as inflation fell from its high of 9 percent to less than 5 percent—much closer to the Federal Reserve’s target of 2 percent—the unemployment rate fell along with it.
One reason for the disconnect is that market forces create a constant incentive for employers to do more with less. Faced with pressure to raise wages, the rational response is to seek productivity increases wherever possible—or even, gasp, to accept lower profits for shareholders. A remarkable illustration comes from the 1960s, when the United States decided to end the Mexican bracero program that provided farms with half a million low-wage guest workers each year. The result was not the proverbial $50 pint of strawberries, but rapid mechanization. In other words, instead of relying on many poorly paid jobs filled by guest workers, the industry created new, better jobs Americans would do—in equipment development, production, and operation. The lesson: If employers know that they’ll always have to pursue profit with a constrained labor supply, they will invest and innovate in ways that benefit workers. Bringing manufacturing back to American shores, for example, would not mean replicating Asian sweatshops, but rather creating capital-intensive, high-productivity factories with good jobs here at home.
We also should scrutinize the term inflation, which doesn’t mean the same thing at all times to all people. For workers at the low end of the income scale, wage increases are desirable even if they do partly translate to higher prices, because those workers will see their earnings grow faster than the prices they pay for consumer goods. (This is because labor is only one of many factors that determine prices). Wage growth may fuel some inflation, but those receiving the raises see real net gains. Higher-income workers might lose out in this scenario, as they pay more for the same goods without getting a raise. After decades of widening inequality, market forces would finally work to the benefit of those who have been left behind.
And yet, the political and economic establishment sees this outcome as a cause for alarm, not excitement. Enthusiasm for “free markets” turns out to depend on which interests those markets are serving. As both The New York Times and The Wall Street Journal have recently reported, corporations seem to be taking advantage of the inflation story to raise prices beyond what their rising costs require. Yet conservative think tanks and op-ed columnists seem uninterested in calling on the government to tackle that issue. Equally damning for the left of center, meanwhile, is the embrace of immigration as a “solution” to inflation—which finally acknowledges the reality, long denied by liberals, that unskilled immigrants suppress the wages of low-wage workers already here. “When labor is in short supply relative to demand, employers offer higher wages,” explained the pro-immigration advocacy group FWD.us last month. “Immigration policy that responds quickly to market shifts can stabilize prices for consumers and offer relief to employers.”
Low prices for consumers and relief for employers, but no mention of existing workers: a fine summary of America’s economic agenda for the past half-century. One hopes that the spectacle of our leaders scrambling to keep poor workers from getting ahead will finally expose its absurdity. Good jobs that allow workers to support their families and communities can’t be just a hoped-for by-product of a market economy; they must be its purpose. Gains in consumption and material living standards are good, but cheaper prices through lower wages is a losing proposition for working-class families and the nation as a whole.
The modern American economy has not failed with respect to the material standard of living. It has failed in the creation of insecure jobs that do not meet workers’ needs, a shift in the distribution of income that has left working families struggling, and a decay in social solidarity as the winners declare themselves the most valuable and the losers expendable. To reverse those trends, workers must have the power that comes from being needed.
Support for this article was provided by the William and Flora Hewlett Foundation.
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