Monday, February 10, 2014

Labor Supply vs. Labor Demand

Here is a key point to keep in mind: Labor supply and labor demand are separate and independent variables. When the demand exceeds the supply, wages will tend to rise, and when the supply exceeds the demand, wages will tend to fall.  The large number of women entering the workforce beginning in the 1970’s increased the supply and put downward pressure on wages.  Starting about that same time, automation and globalization decreased the demand and put downward pressure on wages. I believe these are the reasons pay has not kept up with inflation and economic growth in recent decades. 

While it was standard in the 1950’s and 1960’s to have one wage earner per family of five, it has now become standard to need two wage earners even in a family of three.  Here’s an idea.  If all the men were to decide now to leave the workforce, there would be a tremendous shortage of labor, upward pressure on wages, much higher pay for working women, and the need for two wage earners per household would disappear, at least for those households in which there is a woman.  Equal pay for equal work might still be an issue but with no sexual component.  And the interiors of houses would get dirtier and dirtier even as landscaping improved dramatically, cars glistened, and garages became perfectly organized.  I'm not sure how the children would fare.        

One factor that could be easily overlooked is the change in family composition over fifty years.  The standard, admittedly for a very short time in the history of the universe, was wife, husband, and three kids with one breadwinner heading out to work five days a week, eight hours a day, and one homemaker doing the really hard full-time work of housekeeping, child rearing, shopping, meal preparation, etc. Now there is no standard.  Single parents and unmarried folks living alone abound and usually must work both at home and away.

Homelessness is an issue exacerbated by the breakdown of the family and could be greatly reduced by formation of a new family structure, two heterosexual, down on their luck, homeless guys in a civil union.  Lots of homeless guys have some income such as disability and food stamps but not enough to rent an apartment and pay utility bills.  Two such persons together could swing it and leave the ranks of the homeless. They would just need a two bedroom unit.  The union would have to be civil though…no fighting allowed.

What made me think of this mess is recent news on the number of people expected to leave the workforce because of the Affordable Care Act.  Here is what the CBO office reported: "CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 to 2 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive," said the report. 

It almost seems like the strategy of our leaders is to get us to just relax and smell the roses.  Don’t worry about working, they seem to be saying.  They will take care of us. 

ACA supporters are saying that this is a great thing because people who were in jobs they didn't really like just for the sake of health insurance can now stay home.  With the ACA, extended unemployment, expanded food stamp rolls, and early retirements, more and more are making that choice.  There will be a tipping point at which wages will soar as labor supply dries up.  Eventually, wages will be astronomical, but nobody will be working. 

It’s a complicated world, mostly because we make it so. Go back and read the first paragraph again.  It is probably the only thing in this post that makes any sense.


3 comments:

  1. This is one ACA supporter who is saying nothing of the sort. People in jobs just for the insurance can now leave that job if they wish to start a new business; or those with adequate savings who are in high risk jobs. can retire at 60 instead of continuing to work. There are a whole host of good reasons for forgoing your current job when you know that you can get heath insurance otherwise. I know of some young people who have given up their insurance coupled jobs to go out on their own. The first paragraph may be the only sensible one but even the last sentence is just conjecture. In the limit, if we had a single payer socialized system, according to the ACA opponents, everyone would quit their job. Just my view.

    ReplyDelete
    Replies
    1. Coupling of employment and health insurance, which seemed to so many of us to be a good thing in a paternalistic long term employment system also with guaranteed pension benefits, was a terrible idea primarily because it gave the insurance companies too much power and too much business, often just serving as administrators with no risk, and restricted employee options.

      Delete
  2. Senator Chuck Schumer on the subject. http://www.theguardian.com/world/2014/feb/09/democrats-obamacare-work-life-balance-cbo

    ReplyDelete