Labour Market Pressure

I suspect that we are going to see increasing pressure in the labour market in New Zealand. Despite Covid and the worldwide economic shutdown, the unemployment rate here has remained low. According to Stats NZ, 3.4 percent in the September 2012 quarter, which is low by international standards.

Despite the shutdown of the tourism businesses, and many related industries, such as accommodation, restaurants and cafes, transport, demand for labour is strong. Businesses are having difficulty getting staff to fill vacancies. Some industries are calling for the government to increase migration flows so that they can employ staff. One reason is that Covid restrictions in place, net migration has gone negative, with more people leaving than coming in.

Over the last couple of decades, successive New Zealand governments have allowed significant inflows of migrants. For the past decade, annual net migration to New Zealand was more than 50,000 in most years. It had peaked at over 100,000 in 2013. It was at similar levels during the first few years of the 2000s.

These high levels of migration had two consequences. The first was pressure to build enough houses and the infrastructure needed to support the large numbers of people arriving in New Zealand. Hundreds of new school classrooms have had to be constructed, and hospital capacity has felt the pressure. The housebuilding industry has boomed, and house prices have risen rapidly.

The other impact of migration is in the labour market. If there are large numbers of migrants willing to work for the minimum wage, employers have no incentive to pay their lower-paid staff more, because they can easily replace them with migrants on the minimum wage.

This external source of labour supply has now come to an end. The demand for labour will put pressure on wages. This is probably the best thing that could have happened for people in low paid jobs. They will have more choice, and should be able to negotiate better pay.

I suspect that we will begin hearing pressure on the government from industries that employ cheap labour for it to bring in more migrants, so that they can get the staff they need without having to pay high wages. The agriculture sector and the restaurant and café industry are already complaining that they cannot get staff (mainly because they have paid low wages for unsocial work hours).

I hope the government will resist these calls. It would be a mistake to go back to the policy of bringing in large numbers of relatively unskilled migrants so that we continue to be a low wage economy. The only ones who benefit from that policy are stingy employers, but they don’t have the right to cheap labour so they can earn greater profits.

In a competitive economy, not every business that is established will be economically viable. Some good business ideas will fail because their production costs, including wages and salaries, are greater than their sales revenue. Forcing wages down to make these uneconomic businesses viable is not a sensible economic policy.

In a free market, the solution to shortages is not a government mandate. Instead, prices should adjust until supply equals demand. This same applies to the labour market. Businesses that cannot obtain the staff that they need should pay more. If they raise their pay offer sufficiently, they will usually obtain the staff they need.

If businesses are not viable at prevailing wage rates (not those that applied last year when pushed down by cheap migrant labour), the business owner should be thinking twice about what they are doing. If they cannot pay their employees a reasonable wage rate, they are not contributing much to the New Zealand economy.

There are not a fixed number of jobs in any economy. An economist recently said that New Zealand has a shortage of about 2000 skilled an unskilled people, but that is the wrong way of looking at it. The real problem is that there are 500 odd businesses trying to operate even though they are not viable given the resources currently available.

Employees like a situation where there are more job seekers than jobs, but a situation where there are more jobs tham job seekers is more beneficial at this time when a lift in wages is needed by poor working families. 

See Employers and Wages.

Undercover Boss

In the past few weeks, I have watched a couple of episodes of Undercover Boss. I think it is a bit dishonest. The way that the boss throws the company’s money around at the end, so that he appears kind and generous, is a bit cheesy.

However, I find it interesting from an economic perspective. One of the principles of economics is that in a market economy people get paid according to their productivity. If employees want more pay, they need to be more productive.

The undercover bosses find a few duds, but mostly they are surprised by the dedication and enthusiasm of their staff. They are so impressed that they want to do something them to bless them.

The interesting thing is that economic practice does not match economic theory.

• These bosses have no idea how productive their staff are.

• They are paying these staff less than they are worth (that is why they feel they need to give them something to compensate them).

• The boss only identifies a few of their good performers. All the others in the business are not recognised and will probably continue to be unrewarded.

• Most bosses do not know what is going on in their business. They are surprised by the negative consequences of many head office decisions.

• When they find a bad employee, they usually fire them.

• Although the undercover bosses have not been doing their job properly, and are not as productive as they think they are, they never suggest taking a pay cut (a double standard).

Contrary to economic theory, the program shows that productivity and remuneration are often disconnected.

Markets and Wages (7)

Here are some more problems with market wages that mean a righteous wage is still relevant in the modern world. Wages and salaries are often disconnected from supply and demand.

• In the labour market, adjustments takes place through a change in quantities rather than a change in price, as market theory suggests. Employers do not compete on price, because the long-term risks of that strategy outweigh the short-term benefits. When a profession is scarce, it is much safer to just pay what others are paying and not rock the boat. A few high performers will be paid extra, because they are critical to the business, but most staff others will still just get the going rate, or small increases.

• Neoclassical economics claims to have proved that in a market economy, every employee will be paid what they are worth. All differences in wages and salaries reflect differences in productivity. The problem with their proof is that their economic model depends on a serious of unrealistic assumptions that have no connection to the real world. That has not stopped employers from hiding behind the idea.

• The neoclassical market model assumes that every employer knows the marginal productivity of every employee and pays them accordingly. According to the model, an employer should keep employing additional employees until the marginal wage of the last employee equals the value of their marginal product. This is fine in theory, but the reality is that employers have no way of measuring what an individual employee has produced, so they no way for assessing what an extra employee is worth. A mix of capital and people contribute to every product, so the contribution of one person cannot be isolated. Employers cannot measure the contribution of a single employee or group of employees, so they most just fall back on paying what other businesses are paying.

• An employer has no way to compare the productivity of one class of employees with another. There is no economic model or accounting model that can show that the productive value of an accountant is five times greater than the productive value of a good receptionist. Decisions about their relative value depend on the subjective judgment of the employer, and they can easily be wrong.

These inadequacies with the standard economic model do not make much difference in most situations. Provided the employer has acted in good faith, and the employee has freely accepted the wage or salary offered, the situation is legitimate. However, the situation is different where the wage being offered is not enough for the employee to live on. This is where the righteous wage kicks in.

Markets and Wages (6)

There are several problems with market wages that mean a righteous wage is still relevant in the modern world. Wages and salaries are often disconnected from supply and demand. Market rates can be inadequate for people to live on.

• In every economy, a large proportion of employees are easy to replace. They often have useful skills and are doing work that is important for society, but other people can learn to do their work quite quickly, so employers can replace them if they request a better wage rate. These people cannot complete in a market, because they will always be at a disadvantage. They can often end up earning less it costs to live. The market rate will often be significantly less than a righteous wage rate.

• When low paid employees increase their skills by undertaking training, they are often not rewarded with an increase in wages. Market pressure means that they are not compensated, despite being worth more to their employer.

• Many employees do not have enough information to know what is the market rate for all their employees. Most will just pay what others pay. For low paid staff, they just pay the legal minimum wage.

• Some industries are more profitable than others. People working in these profitable industries are often paid more, even if their productivity is less than those in other industries. The finance industry is a recent example. Salary rates in this industry are disconnected from productivity, and supply and demand. This shift in income share penalises people on low wage rates.

• The price path over time for a good or service is often influenced more by the price in earlier periods than supply and demand in the current period. In labour markets, historical practice has a very strong influence on wage and salary rates. For example, economists are everywhere now (and often wrong), but they are still very well paid. Salary rates have more to do with what economic analysts were worth forty years ago, when they really were scarce.

• Salary and wage rates are slow to respond to changes in supply and demand. When there is a glut of a highly-paid profession, salaries do not drop to the low levels as the simple market model would suggest. Salaries just stay high, because they have always been relatively high. Others wages stay low, even when there is a shortage, because they have always been low.

Markets and Wages (4)

The other situation where the Instructions for Economic Life put constraints on the free markets was in the labour market. The employer is a neighbour of the employee. This gives the employer a moral obligation to ensure that their employee has sufficient to live on. Paying the wage or salary determined by the free market will be fine for most people. The situation is different with people who are poor and needy. The employer must not take advantage of their desperation.

Do not take advantage of a hired worker who is poor and needy, whether that worker is a fellow Israelite or a foreigner residing in one of your towns. Pay them their wages each day before sunset, because they are poor and are counting on it. Otherwise they may cry to the LORD against you, and you will be guilty of sin (Deut 24:14-15).

Most economies will have a large number of people who are poor and needy. This will push the market wage rate very low. An employer is not entitled advantage of the situation by paying the lowest wage rate that they can get away with. An employee who is desperate for work must be treated as a neighbour. They should be paid enough for them to live on.

Jesus confirmed and clarified this principle in the parable of the workers in the vineyard (Matt 20:1-16). The vineyard owner did not pay the market wage rate, he promised to pay the employees “what is right".

Go and work in my vineyard, and I will pay you whatever is right (Matt 20:4).

In every economy there will be a market rate for day labourers. Jesus confirms that there is a rate that is “right”. The Greek word is dikaios, which means righteous. The righteous wage rate may not be the same as the market rate. The employer who wants to do what is righteous cannot just pay the market wage rate. They must take into account what is righteous, as well.

For Jesus listeners, what is right referred back to what is specified by the law. The workers who were employed for the whole day were offered a denarius. That was the accepted rate for a day’s work at that time. The employees who only worked for part of the day were also paid a denarius.

He agreed to pay them a denarius for the day and sent them into his vineyard (Matt 20:2).

The workers who were hired about five in the afternoon came and each received a denarius. So when those came who were hired first, they expected to receive more. But each one of them also received a denarius (Matt 20:9-10).

The employer paid every worker a denarius, even though some had only worked for a few hours, while others had worked for a whole day. In those days, a person needed about a denarius to buy a day’s rations. These people were on the poverty line, living from one day to the next. The employer paid each person enough to buy food for the day, even if they had not worked enough to earn it. He was applying the requirements of the Instructions for Economic Life (Deut 24:15). An employer has an obligation to ensure that his employees have enough food that they will be strong enough to work the next day.

The employer in the parable paid all his employees a denarius, regardless of how long they had worked. This was the righteous wage rate, not the market rate. He knew at the end of the day that they would not be able to earn any more money until the next day. If they did not get sufficient income to buy food, they and their family would go hungry until the next day. The righteous thing was to pay the employees enough to live on to the next day, when they would have the opportunity to earn some more.

Markets and Wages (3) Poor

The Instructions for Economic Life put two other restrictions on free markets.

The Poor
Everyone with wealth has an obligation to care for the poor within their neighbourhood. Gleaning is an example of a transaction where the free market price did not apply (Deut 24:19-22). The landowner made grain available to poor person at a zero price. The gleaner had to pay with their labour, but the landowner received no return at all. The market price did not apply to these transactions.

Another example was loans to people in financial difficulty. The neighbour was required to make the loan for zero interest. The market interest rate would usually be well above zero, especially when an allowance for the risk of default was built in to the market rate. This is another situation where the free market was constrained, and a free market price was not legitimate. Charging the market rate of interest would be morally wrong.

Famine
Charging free market prices is not legitimate during a famine.

People curse the one who hoards grain,
but they pray God’s blessing on the one who is willing to sell (Prov 11:26).

Storing grain for tough times in the future is good and prices will always rise when food is scarce. This helps ration out scare supplies. But people who hold back grain and food during a famine just to force the price to excessive levels during a crisis, place themselves under a curse. People with surplus food should be careful about deciding what price they will charge. They must be careful not to just follow the market.

Markets and Wages (2) Fraud Forbidden

The first restriction on free markets is that fraud and deception are forbidden. They are considered to be theft, even if the transaction appeared to be free.

Do not have two differing weights in your bag—one heavy, one light. Do not have two differing measures in your house—one large, one small. You must have accurate and honest weights and measures, so that you may live long in the land the LORD your God is giving you. For the LORD your God detests anyone who does these things, anyone who deals dishonestly (Deut 25:13-16).

This instruction was given in a context where coins were not available for trade. Payments for purchases and sales were made by weighing out gold or silver. A clever way to defraud people was to use scales that weighed light when making payments and a different set of scales that weighed heavy when getting paid.

This type of fraud was an example of what economists call asymmetric information. The person who owned the scales had information that the other did not have. They assumed that they were getting full weight, whereas the person with the scales knew that they were not getting full weight. Even if the exchange occurred freely at an agreed price, the transaction was theft, because the person with the scales was taking something that belong to the other, without getting their permission. Dishonest buying and selling is theft.

The instruction applies to everyone selling goods or services. They must represent the stuff that they are selling accurately. Selling flawed goods as if they are good quality is wrong, because “God detests anyone who deals dishonestly”. This is not a totally free market, where people can take whatever price they can get, even if it is greater than they think the goods are worth. Nor are they entitled to pay the lowest price possible, especially if they think the goods are worth more. Two comments are common in business:

• Let the buyer beware.
• What the market will bear.

They have no place amongst God’s people.

The economic system that system that God gave Moses allows and supports free markets, but this is not freedom without constraint. Trade is free, but it must be honest. Dishonest trade if morally wrong, because it is theft.

Markets and Wages (1)

Free markets are good, and a great system for encouraging economic development. Prices are information carriers, that help producers and consumers make decisions. By studying prices, producers can decide which products are best to produce. Relative prices help producers decide how to combine together the various inputs to a production process in the most efficient way. Consumers use prices to compare the value of different products. Without the information carried by prices, many of these decisions could not be made effectively.

The problem with free markets and prices arises when they are applied to the labour market, because wages and salaries determine the ability of a person to live. Market wages and push some people into poverty.

The Instructions for Economic Life support operation of free markets, but they place limits on them to protect people.

“Do not steal” is one of the Ten Words given to Moses. The implications of this command are spelt out in the rest of Exodus and Deuteronomy. Stealing is a crime, and the penalty for theft is four or fivefold restitution to the person who property has been stolen.

By establishing crime as theft, the God’s law protects private property. If someone wants something that I have produced, they cannot take it without my permission. Taking something that belongs to someone else is theft. This protection is important for economic development. People will only invest in capital and develop efficient production processes, if they know they can sell their product. If someone powerful can steal everything that has been produced, they will not bother. They will produce what they can consume or hide, and do nothing more. This would make everyone in the economy worse off.

The law against theft means that there is only two ways that someone can get something that belongs to me.

1. If I am generous, I might decide to give it to them. This will happen sometimes, but it will not be that common, unless they are family or a friend.

2. They can swap what I have for something they have, including money. Free exchange for payment at the market price will be the most common way that people get access to goods and services for someone else.

The law against stealing encourages the development of free markets and free markets function effectively when stealing is prohibited. If people can just steal anything that they want, free markets will stop functioning and the economy will become productive, because anything that cannot be hidden will be lost.

The instructions for economic life endorse free markets, but they also place limits on them. Freedom to sell or buy at the market price, does not apply in every situation.

Tomato Justice (3) - Low Wages

The Bible does not specify a particular wage rate for particular task. This would be impossible because wages vary according to the type of work and the availability of workers. What is low in America might be high in another country. There is not such thing as a just wage. Biblical justice is more concerned about the process that about the wage level. If the process of wage negotiation was just, the wages are not unjust. A just wage is a rate agreed by two employer and employee without coercion.

The Bible does not even forbid the payment of different rates to different people. Jesus said that at employer is free to offer whatever wages he chooses, provided that no one is forced to accept those wages (Matt 20:1-16). Employers can offer a low wage rate, if they choose. If they go to low, they will find that not prospective employees accept their offer. They might have to go higher to get the staff they need. If many people are looking for work, their low offer might be accepted.

Offering a low wage is only wrong, if the person receiving the offer is so destitute that they have not choice but to accept the low wage. Their circumstances mean that they are forced to accept the offer. This is fraud.

Low wages do not prove that an employer has defrauded their workers. Fraud is only proven, if the workers were poor and had no choice but to accept a low wage. They have been robbed because they were forced by circumstances to accept a lower wage than they would normally accept.

A high wage can also be unjust, if the employees used threats to obtain it.

With this background, my next post will look at what is happening in the Tomato case.