Thursday, February 27, 2014

What worker shortage?

Everyone once in a while I stumble on an article talking about the shortage of skilled workers in the U.S. With lines such as:

"Today business groups are strongly supporting immigration reform, including increases in foreign worker visas. They can’t find enough American workers to fill openings in science, technology, engineering and math occupations."

These articles make it appear that businesses want to hire people but they just can't find the right people to hire. But if there is a shortage (many people have called this bluff, see here, here, and here) it is only a shortage at a particular wage. For people who understand the basic supply and demand model a diagram might make this more clear.



In the above diagram, the equilibrium wage and amount of labor, which is where the amount of labor supplied by people is equal to the amount of labor demanded by employers, is W* and L*. The only way there can be a shortage is if the wage is set too low. In the diagram this is a wage of W1. At a wage of W1, the amount of labor supplied, Ls, is less than the amount of labor demanded by employers, Ld. The amount Ld - Ls is the labor shortage.

So there is no labor shortage when the wage is W* and a labor shortage when the wage is W1. If the labor shortage is real it is only because employers do not want to pay the higher wage necessary to clear the market.

Employers often say there is a "skills gap" and thus they cannot find the workers they need. That is nonsense. Again there is only a "skills gap" if the wage is too low to induce people to gain the skills the employers want. For example, suppose there is a "shortage" of software engineers. If firms really cannot find the workers they need, they can increase their offering wage, offer signing bonuses, or provide some other compensation that makes the job more desirable. As the compensation climbs, more people will be willing to take the job, which increases the quantity of workers supplied, and some firms will be unable to pay those higher costs, which decreases the quantity demanded. This will lead to an equilibrium wage rate like W*.

Of course some employers will say "Well we can't offer any more money, we cannot afford it." To that I say so what? If a business cannot stay in business because they cannot sell their product at a price that reflects their true costs than they should not be in business. In this scenario it is obvious that consumers simply do not value the product at what it costs to produce it. That is exactly the reason businesses fail! When consumers stopped valuing He-Man action figures at a value that allowed the producers to continue making the toys I doubt anyone thought that this was a result of paying workers too much. Mattel, the maker of He-Man toys, was paying their workers the wage required to get the amount of workers they needed. They didn't try to keep the wage low in order to keep producing and then whine about a labor shortage. This same idea applies to high tech companies that require engineers, scientists, and other skilled workers.

Employers then might say "Well even if we offered a higher wage it takes time for people to develop the skills we need." Perhaps, but how much time does it really take? As an economist I have extensive quantitative training. I am sure that I could get the necessary skills for many of the engineering jobs available today in a year or less. And I would do this for the right price. If engineering jobs were paying $500K per year I would drop out of my econ PhD program and sign up for the necessary engineering classes tomorrow. I am sure there are many other people in quantitative occupations that would also find the switch worthwhile at that wage. The time to develop the skills needed would be short at a high enough wage because workers who have similar training would be induced to switch occupations. In fact, the necessary amount of engineers might already be out there in the form of retirees. I am sure that a wage rate of 500k/ yr (maybe higher/lower) would induce thousands of retired engineers to re-enter the workforce at a training time equal to what any employee being hired by a business for the first time must endure. The workers are out there; it is the reluctance of employers to pay the necessary wage that keeps them from getting the workers they want.

While I think that the idea of a labor shortage is ridiculous I am not for eliminating H-1B visas. I think that if foreigners want to come to the U.S. and work they should be able to do so. And if they are willing to do the work at a lower wage than natives so be it. Companies and individual workers should be free to decide on what wages they are willing to pay and accept. But what I am not for is using the idea of a "labor shortage" to fund government subsidized worker training programs simply because employers want the taxpayer to pick up their training tab. This is cronyism and it has no place in a free market economy.

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