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Home Publications Blogs Beat the Press Economics 101 for WAPO: Supply and Demand in the Labor Market

Economics 101 for WAPO: Supply and Demand in the Labor Market

Tuesday, 07 May 2013 05:16

Economists generally like to see supply and demand determine prices. When there is a shortage of an item then the price is supposed to rise. At higher prices the supply increases and the demand falls, this eliminates the shortage.

For some reason this simple logic was altogether absent from a Washington Post article that was headlined "Germany struggles with skilled labor shortage, shrinking population." Remarkably the piece never once mentions increasing wages. Instead it talks about efforts to bring in foreign workers.

It seems like Germany might be suffering from the same problem that is often the subject of news stories in the United States: managers who don't know how to raise wages. The media have frequently reported on businesses who complain that they cannot find qualified workers.

Since there are very few occupations where real wages have  been rising in the last five years, it seems that few people who run businesses understand how labor markets work. This suggests that there could be large gains to the economy if the government (both here and in Germany) offered remedial economic courses to business managers explaining the basics of labor markets. Then they would understand that if they want more workers they should offer higher wages. This would eliminate labor shortages and then we would no longer have to read silly pieces like this one in the Post.  

Comments (14)Add Comment
written by Skeptic, May 07, 2013 6:12
Excellent point. There's no such thing as a labor shortage, just managers who want low wages. The policy implication is that we shouldn't be bringing in over a million legal immigrants a year, and should end H1-b. The Gang of 8 bill would add over 30 million additional people within the next decade.
Green card Monty
written by David, May 07, 2013 6:14
Germans have learned from US management: decrease your competition (via patents etc.) and increase competition within the labor pools, then finger the cash while getting historic tax breaks for being a job creator exporter.
written by Frances Woolley, May 07, 2013 7:30
Yes! Agree with you 100%! This exact same debate is being played out in Canada. Another issue to consider: employers' willingness to invest in training. This is important in skilled and highly specialized occupations. I think of it like this: if you go to your cupboard and find that you don't have the sugar you need to make cookies, it's o.k. to borrow some from your neighbour. But if you're running to your neighbour time after time to borrow sugar or flour, that's not bad luck, that's bad management.
Low Wages on the Production Side Follow Low Prices on the Consumption Side
written by Last Mover, May 07, 2013 8:21
What's all the sarcasm about from an otherwise very serious person like Dean Baker who never gets excited as no serious economist should?

Look, if prices can be very low on the consumption side, it obviously follows that wages can be very low on the labor supply side and still be consistent with a skills shortage.

For example, consider the well known shortage of quality cat food sold at relatively low prices compared to food considered fit for human consumption.

It takes a long time to search out and find this kind of cat food, higher prices of which would not correct the shortage since cat food has evolved into a Giffen Good for which the income effect has overcome the substitution effect and even more would be consumed at higher prices, actually intensifying the shortage.

Same applies to so called skilled, high quality labor which has evolved into a Giffen Good itself from the perspective of employers who pay for it. Rather than hire more of it at higher prices based on the income effect, just hire less of it at lower prices on grounds that the substitution effect present in a functional free market acts to prevent paying skilled labor for what it produces.
Again with the raising wages., Low-rated comment [Show]
managers who don't know how to raise wages?
written by RobertP123, May 07, 2013 9:35
C'mon, let's get real. More accurately, it's managers who have been conditioned by corporate culture to avoid raising wages, and who's first perogative is to find a place where the same work can be done, cheaper. (ie somewhere like mexico, china, malaysia, etc.)
wages cannot be higher than productivity..., Low-rated comment [Show]
keeping the periphery down
written by bink, May 07, 2013 11:30
If it made sense for Germany to tolerate some extra inflation (and it does, in the short term) the central bank would never allow it, because those lazy Greeks have got to take their medicine.
Exceptions to the rule
written by cahuenga, May 07, 2013 11:38
I've always wondered why agricultural workers seem to slip through the supply and demand curve. We are told the no Americans will do this job, when in reality it is that no Americans want to do that job a the wage employers wish to pay. Agribusiness believes in supply and demand only when it benefits them.
let us make lettuce $10 a head...., Low-rated comment [Show]
re: "lettuce" make lettuce $10,00 a head
written by John Wright, May 07, 2013 10:02
Per: www.examiner.com/article/no-il...ve-lettuce

"Phillip Martin, an economist at the University of California, Davis, has explored these costs. According to Rich Lowry of National Review, Mr. Martin's research "has demolished the argument that a crackdown on illegal labor would ruin the agriculture industry or be a hardship to consumers. Most farming--livestock, grains, etc.--does not heavily rely on hired workers. Only about 20% of the farm sector does, chiefly those areas involving fresh fruit and vegetables. The average "consumer unit" in the US spends $7 per week on fresh fruits and vegetables, less than [the amount] spend on alcohol according to Martin On a $1 head of lettuce, the farm worker gets about 6 or 7 cents, roughly 1/15th of the retail price. Even a big run-up in the cost of labor can't hit the consumer very hard." Mr. Martin states that, "the reason we have low food costs is because we have high incomes and very productive land, not because wages are low."

So if all of the incremental cost goes to higher farmworker wages, and lettuce increases by $8 to $10, then the farmworker who was making $0.07/head will now be making $8.07.

This is a x 115.286 increase.

If the farm worker were making 8K per year, they would now have a salary of 922K/year.

Wow, nearly a million dollars a year to pick $10 lettuce.

Now here are some of the employment statistics for some California counties that emphasize agricultural production. Imperial County (just north of the Mexican border) is at 24.2% (February 2013, Fresno County (Central Valley) is 15.4% (February 2013) and Kern County at 13.6%.

Seems like there isn't too much of a labor shortage in these counties currently.

This compares to a 9.4% overall California rate.

High wages encourage automation and government encouraged low wages (via de-facto unenforcement of employer penalties) help preserve the tasks known as "JADW" (Jobs Americans don't want).

Substitution of machines for human labor has gone on for many years, but it tends not to occur unless there is an economic advantage. Hero of Alexandria published a description of a steam powered device called a "aeolipile" before 70 AD. Some have suggested this "steam engine" was not exploited until the steam engines of the 1700's partly because human labor was so cheap.

Um, yo have it backwords sir
written by Lrellok, May 07, 2013 11:51
Actually, i would say that most employers understand supply and demand exceedingly well. What they understand is that if they flood the market with workers (IE increase supply) they can slash wages and keep more money for themselves. SO they whine sophomoric about labor shortages until the government interferes on their behalf, and wages in the private sector fall off a cliff.

A great boon to economics would be if someone (hint hint) was to calculate whether or not wages vaguely resemble to marginal production value of the average worker (in the US or Europe) and if not, how far from marginal value are wages? I have a sneaking suspicion that wages are staggeringly below where the should be. Alternately, you could model what effects having wages above or below marginal product should have, and then look at statistics to see if those effects are present.
written by liberal, May 08, 2013 10:27
Lrellok wrote,
A great boon to economics would be if someone (hint hint) was to calculate whether or not wages vaguely resemble to marginal production value of the average worker (in the US or Europe) and if not, how far from marginal value are wages?

I don't know about marginal production value, but in terms of standard productivity measures I thought it's clear that since 1973 or so productivity has kept increasing along its historical trend, and wages pretty much completely stopped increasing altogether.
Et tu LA Times
written by Nick Batzdorf, May 08, 2013 4:28

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.