The US unemployment rate is currently sitting at the bottom of the range of estimates for something economist call ‘full employment.’ This full employment exists when the only people in want of jobs are those who are changing positions. These folks are likely to be out of work for only a brief period. There are some interesting implications of tight labor markets, including the considerable variation in labor market outcomes across the nation and across workers.To begin, it is important to keep in mind that workers supply their labor rationally. That means they do not offer their labor services if the benefits of not working are higher than the likely wage they will receive. They may instead choose to go back to school or to look after children or elderly family members. Workers may also elect to work in the shadow economy. Common examples of this include providing day care services, doing lawn maintenance or snow removal, or home repair.
Overall, I think it wise to respect these decisions. After all, despite much loose talk to the contrary, workers are not cogs in the national economy to be vigorously shuffled into whatever job opening best suits the regional economy. Families are at the heart of labor supply issues.
Businesses are equally rational. They seek to hire people based on the additional value that worker brings to the business. So, they are very careful to look for and screen the best workers for their firms. Some businesses allocate significant training dollars on new workers, others must take who is available. Most of the variation in the amount of training provided is due to the industry, not to differences among firms. So, most large hospitals might spend significant resources on training new staff members of all types, while a summer lawn service might only spend part of a day in training.The wage rate for an individual worker is established by the willingness of the worker to offer their services and by the willingness of the employer to hire them. Of course, there are many unique dimensions to labor markets. Fewer workers in one place may bid up wages or cause businesses to relocate entirely. Education and experience tend to increase the value of a worker, so businesses are willing to pay more for both.
Some skills matter a lot in wage determination. The ability to throw a 60-yard pass consistently in an NFL game or attracting 35,000 people to an expensive music concert 60 times a year tend to be valued a lot more than making a nice sandwich or delivering a superb lecture on economics. It should be obvious of both the supply and demand issues involved here.
Government can be involved in labor markets. We subsidize K-12 and higher education for many reasons, including the likelihood of improving worker productivity and wages. We also set minimum wages and most states succumb to egregious occupational licenses that hinder fully qualified people from doing jobs. Those matters are grist for later columns, but reflect governments interfering for good and for ill in labor markets.
Tight labor markets generally cause workers to re-enter the labor market. Workers may finish school more quickly, or may delay a graduate degree. Some folks will find that they can now pay for the daycare that allows them to return to the workforce, and others who were semi-retired might be lured back into work. At the same time, tight labor markets cause businesses to loosen some workplace rules and ease minimum job qualifications. These steps are especially good for workers with very little experience or low levels of education.
Tight labor markets can also run up wages, especially in thick urban labor markets where there are many employment options. This is good for workers, but not for businesses, who might choose to invest in automation. Indeed, as good as tight labor markets are for workers, they are a panacea to those selling labor-reducing workplace automation. Moreover, tight labor markets typically drive employers to more populous, urban places. So, the dynamics of full employment continue to push automation and urbanization of jobs.
Michael J. Hicks is the director of the Center for Business and Economic Research and professor of economics in the Miller College of Business at Ball State University.