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.

Greece

The Greeks voted for horrible pain over terrible pain, with no real idea of which would be worse.

The big problem for the Greek people is unemployment. The unemployment rate reached 22.6 percent for the March 2012 quarter. However, for youth the rate is 52.7 percent. The female rate is 60.4 percent.

More than a million people are not working, and consequently not producing. This is a huge burden any economy.

A massive number of jobs need to be created, but in all the debate about sovereign debt, commentators have been lost sight of this problem.

In thinking about this problem, we must remember a fundamental principle.

• Government cannot create jobs
• Employers create jobs

Where are the employers who will create a million jobs in Greece?

The Greek government cannot do it. Public service jobs have been padded for years, so jobs will be disappearing, not being created. (In tough times, it is cheaper to pay the unemployment rate than to public service salaries to people who have not real work to do).

The European Central Bank cannot create jobs in Greece.
Angela Merkel cannot create jobs in Greece.
Barack Obama cannot create jobs in Greece.

Greece needs employers to create a million on jobs. I do not know where these employers will come from.

Sticky Wages

A common view among economists is that wage stickiness is one of the reasons for the high levels of unemployment during the great depression. In most markets, excess supply pushes prices down which increase demand until the market is cleared. They argue that this cannot happen in the labour market, because unions prevent wages from falling. Unemployment, which is excess supply of labour, becomes a problem because high wages prevent the labour market from clearing. These economists argue that unemployment would not have been a problem during the great depression, if wages had been allowed to fall.

There are two problems with this view. Firstly, all wages do not need to fall to clear the market. If all wages were forced down, the capacity of employees to consume is severely restrained, which harms the economy. Fortunately, prices only have to fall at the margin to clear a market.. The price only has to fall for those goods currently on offer for sale, not for all those that have been sold previously.

Wages only have to fall at the margin for unemployment to be cleared and this happens anyway. People who lose their jobs usually have to take lower-paying work to get another position. When a business replaces people, it can usually take on less experienced people who are not paid so much. These two effects mean that wages do tend to fall at the margin during times of unemployment.

The second problem is that business declined so rapidly during the Great Depression that the marginal wage would have had to fall to zero to clear the market. The collapse of the banking sector and the collapse of commodity prices killed off many businesses. These were the problems that had to be resolved, before the labour market could return to normal. An overall decline in wages was not the solution.

The crisis in the 1930s was caused by problems in the capital markets and not in the labour market. The depression was the consequence of a distortion of the capital markets. Wages could not adjust enough to resolve a problem in the capital market.