No More Shortage of Labor Than of Diamonds

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):

Labor demand is very strong, and while labor force participation has increased somewhat, labor 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.

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