Why is the market reluctant to raise wages?

Great Debates
21

OPs question is interesting. U.S. employment is almost 61%, higher than at any time since 2008, and not far from the 64% record set in the late 1990’s. Yet wages stagnate.

I saw an interesting article in the Washington Post. Seven million Americans are 90 days or more delinquent on their car payments. Since cars are a necessity and easily repossessed, this is an indicator of financial distress. Young car-owners are especially affected.

Meanwhile, the Chairman of the FRB has repeated his warning:

22

Well yeah. I would have gotten a big raise if I had become CEO of my company. (A really big raise.) And most people would have gotten a big raise if they got my job.
People who take themselves out of the market for truck driving jobs (as you and I both do) aren’t in the market which might determine their wages. Jobs see the same market segmentation as products do.

23

Your example is highly incongruent with the industries under discussion in the OP.

There’s a genuine market for truckers. A long-haul worker can switch from the NY-Chicago route to St Louis-Denver and maintain roughly the same productivity. Trucking is a skill, but pretty much all truckers of this sort have very similar skill sets. But I know if I suddenly became, say, a corporate finance researcher, it would take me time to learn how to do that effectively. Specialization and hyper-specialization are not the same thing.

Unless it’s your contention that researchers can switch positions just as easily as long-haul truckers can switch firms? Except you’ve stated that’s not the case: “Existing hires have barriers to shifting jobs.”

Well, yes. If we start talking about industries with different characteristics, then we’ll have to alter our conclusions. Jobs like trucking, certain subsets of nursing, teaching, etc., simply don’t work like PhD research. I don’t think anyone should be surprised by that.

My numbers were made up, is what I was trying to say. I was copying from the OP, which was exaggerated for effect.

But you’re absolutely right, the underlying principle for these kinds of industries is well understood.

24

also when talking about jobs like truck driving or farm workers having a labor shortage is how shitty the job it self is conditions are

25

A quick Google search shows that only 2% of truck drivers are unionized. I would have thought it much higher. I agree - unionized jobs would have different scales and issues.
I also agree that wage stickiness is a big factor. Giving 0% increases for bad performance is a lot more effective when the average raise was 8% (during the high inflation period) than it was when the average was 2%.

26

I’m not sure, with so many trillions of atoms, the chances of them having no net electric charge are slim … wait, nevermind.

27

You said

and I was noting that it happens.
I don’t know the trucking industry, but say that a shortage caused a company to raise its wages for new drivers. (Possibly using a bonus instead of pay.) They will have a limited number of openings at this rate, so not all drivers at other companies which pay the lower rate will be able to move, and so the impact on the other companies will not be all that great. So the drivers in the company with higher rates won’t necessarily have anywhere to go.
If the industry is unionized (as is the case for teachers) the situation is different.
That we had PhDs only shows that it is a specialized market, but there are also fewer positions available. The point is that the pay situation for competitive offers varies significantly from that of raises.
Do you have any examples of internal pay rising in lockstep with offers in competitive markets?
BTW, in Silicon Valley people can switch positions quite easily. I did it and the only impact was that my commute decreased. But I retired from a place which was clearly on its last legs, and though nearly everyone who eventually got laid off got jobs, very few jumped ship ahead of time though they almost certainly could have gotten raises if the did so. We worked in an area where we were quite aware of production, and so the problems were hardly invisible.

28

‘Teacher shortage’ usually refers to public school teachers so that’s not a market decision, at least not directly.

For the other two the main reason is that people aren’t unconscious commodities. If you’re a miller with 90% of the corn you need to make your product, the previous 90% of the corn doesn’t care if you pay a lot more per unit for the last 10%, it’s strictly a matter of whether you profit more from processing the full 100% than from processing only 90%, given the prevailing price for the last 10%.

If in contrast you have 90% of the pilots or drivers you need, they do care if you pay the final 10% a lot more. You can try to keep that confidential, but it will only work to a limited degree. To a significant degree today’s marginal market clearing price will apply itself retroactively to your existing ‘inventory’. So it’s not 80 v 100k on the last few drivers to fill out the roster, it’s 80>100 on every driver*. It’s more likely in that case that the profit maximizing tactic is to turn away business you can’t handle with the number of drivers you can keep working for you at 80.

IOW you have to ask how severe the ‘shortage’ really is. If it’s having to bid way up to fill the last few vacancies, it might make not make sense for a given business to do that. It would be part of the general curve of diminishing returns by which every company in the world does not expand infinitely. OTOH if you have mass resignations among the people you’re paying 80 because they can do better elsewhere, the wage almost surely will move up to where that’s not the case. Because every other firm will be experiencing it, and the market price for the service (trucking) will rise to support it.

*which is especially true in that case since trucking companies often pay per mile. They might get around this to some degree with for example signing bonuses, but by and large it’s going to apply to everyone.

29

I would say in summary that the implication (I get) of ‘hey this is a case where markets don’t work’, is not very valid in this case.

It’s good to take a case of relatively commoditized labor like truck driving, not nearly as differentiated or dependent on knowing a particular company’s way of doing things as myriad different jobs/pay levels in a typical cubicle farm.

There’s just nothing very ‘market failure’ about a case where companies wish there were many more available workers at X wage, which is the wage where the profit (for the trucking company) and value (for the customer) equations work out. But there just aren’t. Most media articles about ‘labor shortages’ describe that kind of situation. There isn’t a lot of thought much less quantification of how the equation would come out if raising wages as much as it took for the ‘shortage’ to disappear. IOW why don’t wages just go up 50%, probably because that would kill all kinds of demand and/or profit.

The reason overall median wages haven’t risen much in a long time (in the US) is a different question, not particularly illuminated by studying the micro-economics of each industry. As illustrated in this case by the thought experiment of why the gigantic number of people who make less than long haul truckers and have the physical and mental ability to do it, don’t. Also that macro question has a lot to do with choosing median rather than average income. Average incomes have increased significantly more. It’s a socio-political judgement to so heavily emphasize median.

30

That Washington Post article is missing some critical information. The headline and first paragraph say that people don’t want a $80k a year job, but most of the people that they interview are making less than $50k. And they’re already truck drivers. There’s either something particularly bad about that company that’s paying $80k if they can’t get people making $45k to move to Minnesota to drive different trucks, or they are not really paying $80k.

“Many of her drivers now earn $80,000, she says, yet she still can’t find enough people for the job.”

That’s… a pretty weasely quote. “Many” isn’t quantitative. What’s the average salary? More importantly, what’s the starting salary.

Because if you’re not already a truck driver, I wouldn’t count on much more than the starting salary. The expected future of truck driving is pretty dim. It would be very foolish to go into truck driving today unless you plan to retire in the pretty near future. Because the trucks are soon going to drive themselves.

31

80k isn’t a ton of money if you’re working 80-100 hours a week. Thats only slightly above minimum wage in some states that now are paying $15. So when someone says they can’t fill a job at $X, its better if they say how much they pay an hour, not per year.

I did find this article.

7 reasons why your salary might not be going up, even though the economy is doing great

[ol]
[li]Productivity gains have been minimal[/li][li]Companies are increasing their spending on benefits[/li][li]Corporations are directing more of their money to shareholders and executives, not everyday workers[/li][li]Tons of low-wage workers are finally re-entering the workforce[/li][li]Unemployment isn’t as low as we think it is[/li][li]Membership in unions has declined, which means fewer wage gains to those both in and out of unions[/li][li]Shareholders don’t want companies to raise wages[/li][/ol]

Even though that is a list of 7, you can really pare it down to 5.

[ol]
[li]Productivity isn’t going up[/li][li]Health care costs are eating up wage increases[/li][li]The wealthy are gobbling up the economic gains[/li][li]The unemployment rate is actually higher than 3.9%[/li][li]Unions don’t really exist anymore.[/li][/ol]

The part about unemployment is true from what I can tell. The labor participation rate peaked at about 67% in the 90s, then dropped ever since the 2008 recession. Its about 63% now. There may be a small spike in 2017.

The labor participation rate now is about where it was in 1980. I assume a lot of the gains before that were from women entering the workforce.

https://amp.businessinsider.com/images/595f80e5f5018435008b4881-750-500.png

But either way, that means 4% of able bodied people who would’ve been worked in the 90s aren’t working now. Thats what, an extra 10 million people (supposedly the US has a potential labor force of 243 million excluding kids and the elderly)? Maybe because there is a pool of 10 million people who gave up looking for work, that suppresses wages. If an extra 10 million jobs opened up tomorrow, I’m guessing wages would go up at least a bit.

32

No? Which jobs teachers take is definitely a market decision. I’m not sure I see how the people in the board of education setting wages is all that different from HR setting wages. A company gets pressure from stockholders to keep costs down, a board gets pressure from voters.
As an example, using another type of public worker, San Jose started to stiff cops, and then was shocked when the cops started taking jobs in neighboring cities which paid better.
If in contrast you have 90% of the pilots or drivers you need, they do care if you pay the final 10% a lot more. You can try to keep that confidential, but it will only work to a limited degree. To a significant degree today’s marginal market clearing price will apply itself retroactively to your existing ‘inventory’. So it’s not 80 v 100k on the last few drivers to fill out the roster, it’s 80>100 on every driver*. It’s more likely in that case that the profit maximizing tactic is to turn away business you can’t handle with the number of drivers you can keep working for you at 80.

IOW you have to ask how severe the ‘shortage’ really is. If it’s having to bid way up to fill the last few vacancies, it might make not make sense for a given business to do that. It would be part of the general curve of diminishing returns by which every company in the world does not expand infinitely. OTOH if you have mass resignations among the people you’re paying 80 because they can do better elsewhere, the wage almost surely will move up to where that’s not the case. Because every other firm will be experiencing it, and the market price for the service (trucking) will rise to support it.

[/QUOTE]

I’d suspect that moving is enough to keep a lot of the $80K drivers from leaving, and some might be comfortable with their routes. The totally rational driver would leave, but none of us are totally rational.

33

Well, are loads not getting hauled because there is a shortage of drivers?

This seems unlikely. Companies that need something trucked aren’t going to just give up if they call up a trucking company and that one is too busy. They will pay the market rate, even if that rate is higher than it was last week.

It sounds to me what’s happening is a number of individual trucking firms have openings on their accounts for driving positions that would be profitable for them at present freight prices. But due to both job matching inefficiency and these firms not paying enough, they haven’t actually found someone to fill those openings.

But if thousands of extra drivers - probably much less than the 100k “shortage” quoted - came out of the woodwork, what would actually happen is that compensation for drivers would reduce, each individual driver would drive less miles, and freight haulage rates would plummet.

To a very tiny extent, lower freight rates would mean more cargo gets hauled, but I think the effect would be pretty tiny. For nearly all business deals, present rates are so low anyways that there are very few deals that would suddenly be profitable if the shipping was cheaper.

34

In the real world, drivers have about ten bajillion different places they can go, and in fact, they do go. Turnover is crazy high in the industry, over 70% for the industry according to some reports, even over 90% for the largest carriers. Some companies can have almost an entirely different fleet of drivers one year to the next. Others like Wal-Mart can keep the majority of their drivers every year, but have to pay a premium to do so.

I’m going to repeat this sentence: There is a labor shortage in the trucking industry.

That sentence has a very specific meaning. Quantity demanded exceeds quantity supplied, at the going wage. Pretty much every warm and mostly-conscious body out of trucking school can get a job immediately, as long as they’re not, like, out on the lamb for murder. (Even then, it’s possible some companies would still hire the guy if he had a fake ID and a decent wig.) RickJay on these very boards has been writing, quite literally for years, about the truck driver shortage. Get qualified = get a job at the prevailing wage. Simple as that. They are hungry for drivers. If you show up with a trucking license and without an overly-obvious smell of whiskey on your breath, there’s a firm out there which will eagerly throw you the keys to a big rig.

They can’t treat their current workers like shit (or rather, more like shit than the normal job regularly demands), and expect to keep their current staff. Many firms can barely keep their current staff, as is. Giving major bonuses to new hires, and not veterans, is a gross violation of basic standards of fairness and equity. It’s just not going to work, and if it were tried (it wouldn’t surprise me if it were tried – firms try everything) it would make turnover even worse, as many of the “new drivers” firms would attract would be drivers from other firms, not new blood from outside the industry. The firms that lost their veterans would then pick off the veterans with their own similar incentive schemes. This is exactly how wage pressure in an industry works: wages are going up now, tho not quickly, because of how tight the labor market is. But wages simply are not going to spike. Firms, individually or collectively, cannot afford the rapid rise in wages that would be required to sharply increase the quantity supplied in an industry with relatively inelastic labor supply. It’s simply not very pleasant work. Even with fairly good wages, especially for long-haul services, it’s hard to lure new people into the industry.

Equilibrium is an extremely important concept.

The power line between two poles sags a bit toward the ground in the middle because of the force of gravity. But it doesn’t sink all the way down to the ground, or pull the poles out of the earth, or rip apart in the middle, because of the inherent strength of the cable, poles, and dirt. How the cable sags comes from a balance between opposing forces. Wages don’t drop in the trucking industry because workers wouldn’t accept it: firm turnover would jump past 100% annually if they paid any less than they do. But wages don’t spike, even given labor shortages, because firms couldn’t afford the additional cost which would have to be applied to essentially the entire workforce, given the inelastic supply. Wages are pretty good for the relatively little training necessary, but they don’t spike. The price comes from the balance between opposing forces.

35

Have you shipped anything lately? It is getting more expensive. I used to have most of my vendors give me free shipping, now I have to pay for it on some of them, and others are talking about also dropping free shipping, and the price of it is going up as well.

These are costs that directly impact many businesses, meaning less money available for wages, or a need to increase prices.

36

It’s still not directly comparable to market forces in private companies. For example where I live both teachers and police are pretty obviously overpaid. That has no real effect except to make property taxes higher than they have to be. But not enough voters are interested in that to do anything about it, most are not property owners. And while teachers and police officers from elsewhere might want to work here, they can’t, limited openings and on the police side at least tend to be filled by people who know people. This is not a screed BTW about privatizing police enforcement, though I believe society is better off with non-govt entities having a right to compete in education. But there isn’t the same market discipline. And conditions like ‘shortage’ (what’s the real staffing need) and ‘qualified’ are defined politically, not $-wise.

I’d agree you could have a case where a district pays so much less than neighboring ones they can’t get anybody to fill their public sector jobs. At some point there’s a boundary at which labor market forces come into play, but it’s much looser than in commoditized private sector employment like truck driving. Which isn’t to say the market for truck drivers is exactly like the market for corn, as in my example before. People’s attitudes, beliefs, irrationality come into play in labor markets, but corn is just corn.

I would still say though it’s not productive to consider public employee ‘shortages’ right alongside ‘shortages’ in commoditized private sector labor like truck driving. They are too different. Though, for different reasons, it’s also hard to compare truck driver ‘shortage’ to say ‘the shortage of engineers’. What kind of engineers? Much bigger variation than among truck drivers.

37

Not all markets can clear. At some point it longer is profitable to ship things if it costs too much. At the same time trucking is apparently a bad job for many people so they have to offer a compensating differential. Most people would rather stay in one place and make 60K than truck around the country for 80K. If the compensating differential is so much that it is no longer profitable to hire people then the market will never clear and the shortage will be permanent.

38

Yeah, but what is the prevailing wage? The WaPo article is trying to strongly imply that it’s $80k, but that appears to be bullshit.

$80k is a very good wage for a (relatively) low-skill job, even one that comes with the downsides of being a trucker (lots of time away from home, unhealthy work environment, relatively dangerous). There’s no way that there wouldn’t be plenty of takers at $80k.

My guess is that the prevailing wage is closer to half that.

39

I put in a cite earlier in the same post that leans toward average starting wage (probably long haul, not local) at around 60k. That could be a bit high, based on hours required, but it seems in the right ballpark. From what I’ve seen, starting local is closer to 30-40.

Yeah I’d guess that’s a crock of shit for most situations.

I mean, a place like Wal-Mart pays around 90k to avoid the 70%+ turnover, but a rookie driver isn’t liable to pick up a gig like that starting out. And most other places aren’t going to offer wage that high for their drivers. They’ll pay less and suffer the staffing churn. Even 80k seems suspiciously high for a rookie in most situations.

40

The market can move very fast when it’s absolutely necessary. During the dot-com boom there was an instant shortage of IT people. The result was massive wage inflation, accompanied by whole new education models to help bring new peopple up to speed. IT people will remember the thousands of MCSE and A+ grads that flooded into the IT space, drawing huge salaries. There were people out there with six months of training pulling down $100K or more. Wages went up remarkably fast, and then they went down just as fast when the bubble popped.

For a long time, this led to crazy situations where someone with a Masters in Comp Sci might be making $80K, while some IT kid with an MCSE was making more.

In computer engineering companies that I’ve worked for, telling someone your salary was a big no-no, because there were times when the prevailing wages would rise due to shortages, and whoever got hired under those conditions would make more than his more experienced peers who were hired when times were more slack. So you could be working beside someone with the same qualifications and abilities but who made $20K more per year than you do just through the luck of the draw - he got hired when times were tight, and you didn’t. Ah well.

So when I hear about permanent shortages in some field, I think there’s more to it than just wages or unionization or whatever. For example, there is a pilot shortage because the traditional sources of pilots - the military and people who learn to fly on their own, have dried up. Downsizing the military in the 90’s created a flood of ex-military pilots who jumped into the airlines. But the military is smaller now, and there are even fewer pilots as modern militaries have fewer, more expensive planes.

The other source of pilots has been people who loved to fly, got their own license, decided to get a commercial license, and eventually worked their way up to an airline by first being flight instructors or pipeline patrol pilots, then perhaps a stint in a corporate flying gig, etc. This source is drying up because private aviation has been nearly regulated out of existence. In the 70’s a Cessna 172 cost about as much as a Buick, and Cessna made tens of thousands of them. Today, a Cessna 172 of almost identical specifications is about $400,000, or ten times the cost of that family luxury car. And Cessna makes a few hundred per year, instead of many thousands.

It takes a long time for a pilot to make it into the airlines if you have to train them from scratch. You need a minimum of 1500 hours and a multi-IFR just to get in the door of the airlines. When I was a student, I paid $39/hr for the airplane and $15/hr for the instructor. Today, the same plane is $139/hr and the instructor is $55/hr. Costs are way up, and therefore the pool of private pilots who might go on to a commercial license and eventually the airlines is much smaller.

Wages in aviation aren’t the problem. The problem is that the system that used to provide commercial pilots is broken. The industry is innovating with things like direct-to-the-airlines training through degree programs at places like Embry-Riddle, but they’re not a great substitute for the huge flow of qualified or nearly qualified candidates that came out of general aviation or the military and is now much smaller.