90 Miles From Tyranny : There Is No ‘Labor Shortage’

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Wednesday, April 17, 2019

There Is No ‘Labor Shortage’

One of the many trade-offs inherent to immigration policy is efficiency vs. distribution in the labor market. Importing more workers from abroad can lower the cost of production, but the savings come in large part from holding down wages. Anyone who claims that immigration offers only benefits or only costs to the labor market is not being honest about the issue. Unfortunately, immigration advocates have a habit of developing exactly those sorts of one-sided talking points. One of the most prominent right now is the idea of a "labor shortage". Forget all this talk about trade-offs, they say, employers simply cannot find any more workers without immigration.

That claim is false. Neither theory nor evidence backs the existence of a "labor shortage". As discussed below, when employers complain of a "shortage", they really mean a shortage of people willing to work for the (low) wage that employers would like to pay. The percentage of working-age Americans not in the labor force remains significantly below the level from the year 2000, and employers should strive to bring those potential workers back.
Key Points

Shortages Should Not Occur in a Free Market

A shortage implies that we have somehow run out of workers to fill essential jobs. Even just on an intuitive level, this seems unlikely. After all, how could the world's largest economy, boasting a population of 329 million, have no one available to work in large industries such as farming, or construction, or software development? And if the United States is in dire need of more workers, how do countries with far smaller labor forces, such as South Korea or Finland, maintain such strong economies?

The answer, of course, is that none of these countries has run of out of workers. In fact, the very notion of a "shortage" in a free market economy is dubious. As long as prices are free to adjust, the market will generally do a good job of matching supply with demand. If the demand for a particular good or service increases, buyers will be willing to pay a higher price, which causes more suppliers to come into the market. That's why we can always take our car to the gas station and fill up the tank, even though the world oil market is routinely buffeted by supply and demand shocks. The price of gasoline changes to absorb those shocks, thus ensuring enough supply to meet demand. It is only when gas prices are not allowed to rise — for example, the Nixon- and Carter-era price controls — that we get genuine shortages.

The market for labor works in a similar way. Employers demand labor, workers supply it, and the market wage is the price at which they meet. Just as with gasoline, there should not be a shortage of labor as long as the price (the wage) can rise. If employers demand more labor, they need to increase the wage in order to increase the supply of workers, just as the price of gasoline rises when demand increases.

When employers today complain of a "labor shortage", what they really mean is there are not enough Americans willing to work at the wage employers want to pay. Employers' unwillingness to raise wages gives the appearance of a "shortage," for which employers claim the only solution is to increase the labor supply by bringing in workers from abroad.

Tight Labor Markets Benefit Marginalized Groups

Sometimes employers are explicit about their desire to keep wages low through immigration. For example, a 2015 report from the farm lobby argued that 0.6 percent annual wage increases for field workers are "a strain on many U.S. farms", and that more guestworkers are needed "to fill job vacancies without upward pressure on wages."1

The better outcome for American workers would be to raise wages. In fact, a tight labor market is the rare uplift program that does not require any new taxes or regulations. It naturally incentivizes employers to raise wages, improve working conditions, and recruit from marginalized groups.

"The tightest labor market in more than half a century is finally lifting the wages of the least-skilled workers on the bottom rung of the labor force, bucking years of stagnation," according to the New York Times.2

"[B]ig companies such as Walmart and Koch Industries ... are turning to an underutilized source of labor: inmates and the formerly incarcerated," according to...

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