The market can solve the labor shortage in the United States – if Washington allows it

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The solution to one aspect of the economic crisis caused by the COVID-19 pandemic may be better addressed by the markets. This is recent recognition from a surprising source: The New York Times.

Times columnist David Leonhardt recently praised the US labor market for “its mechanism for dealing with shortages”, in an article titled “The Myth of Labor Shortages”. While he is wrong to say that labor shortages are a myth – a common mistake by many experts and policymakers these days – he is right that the market can remedy shortages. The challenge is for the federal government to prevent this from happening. The market can solve America’s biggest labor market problem today – too few workers looking for work – if Washington allows it.

Labor markets work like any other market: prices, or wages in this case, automatically adjust based on supply and demand, helping to reduce a shortage. Why? Because prices, when not artificially constrained by governments, provide both valuable information about the relative scarcity of resources and the incentives to use those resources.

This basic economic law means that there is a simple solution to the problem of companies that cannot find enough workers: increase wages. Either that or provide other forms of compensation, such as more flexibility, paid time off or other benefits appreciated by employees.

So why don’t companies instantly start paying higher wages? Some argue that wages are historically low and growing only slowly, while corporate profits are high and businesses should be able to bear the costs. But it’s too simplistic. The United States has actually seen solid wage growth, and corporate profits do not reflect the financial well-being of small businesses.

What matters most is government policy, in particular improving federal unemployment benefits which exclude more people from the workforce, thus limiting the supply of labor. Often, shortages arise when the government hires (teachers and road builders) or with heavy government and regulatory restrictions (doctors, nurses and dentists). Shortages are real but persistent only where government policy makes it more difficult to alleviate them. This is where America is right now, with a record 9.3 million jobs open but millions of people out of work.

Rather than limiting the benefits that stifle work, many federal and state politicians are calling for workforce development training that targets the so-called “skills gap.” In Michigan and elsewhere, the government has funded vocational and technical training and workforce development in the trades. Unfortunately, in a 2019 report, I found that these programs are largely ineffective. Government intervention in schools and high school training efforts and beyond are plentiful, but are not well targeted to high need jobs and do not do a good job of showing real success for applicants.

Is there a better way to solve labor shortages, or any other way? The best idea is still supply and demand. When there is a market for more workers in an area, the answer is consumers pay more for them. In the longer term, when more manpower is needed in certain areas, companies adjust with wage increases and the training of other workers for those jobs themselves.

But for this to happen, government involvement must be limited. The more the government does, the harder it is for the market to work and for people to find work. If the government pulls out, the result will be more hires, higher wages, better benefits and better working conditions. It can’t happen soon enough.

Sarah Estelle, Ph.D., is Associate Professor of Economics at Hope College and Adjunct Research Fellow at the Mackinac Center for Public Policy in Midland, Michigan.

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