October 05, 2017
Fans of the market believe that when there is a shortage, prices rise to eliminate it. Higher prices cause an increase in supply and reduce demand, bringing the two into balance.
That’s a pretty basic story to fans of Econ 101 everywhere. However, when it comes to the pay of workers without college degrees, the Washington Post doesn’t believe in markets. It ran a bizarre piece this morning complaining that the recovery efforts from the hurricanes in Texas and Florida were being hurt by a shortage of construction and manufacturing workers.
The piece really struggles to put together a case for a labor shortage:
“In 2005, Hurricane Katrina wrought about $108 billion in damages. Demand in New Orleans soared for carpenters, electricians and plumbers. Immigrants flocked to the city for the blue-collar work.
“At the time, the country’s unemployment rate was higher — 4.7 percent when Katrina struck, compared to today’s 4.4 percent. More people were looking for jobs, particularly men.
“Male participation in the workforce was 73.3 percent in 2005, while today’s is 69.2 percent. Opioid use, now seen as a factor keeping men out of work, wasn’t yet regarded as a national crisis, and immigration restrictions weren’t as tight. That made it easier for construction firms to find laborers in a hurry when it came time to fix things up.
“In contrast, monthly job openings in the United States reached a record high this summer at 6.2 million. Then came the hurricane season’s aftermath, adding on to those vacancies as communities began to put themselves back together.”
Are we really supposed to believe that a 4.7 percent unemployment rate is a hugely different labor market from a 4.4 percent unemployment rate? As far as the drop in labor force participation, much of this is due to demographics: people have retired. If we look at prime-age workers (ages 25 to 54) the decline in participation rates for men is less than 2.0 percentage points. It is also worth noting that it has risen by roughly half a percentage point in the first eight months of 2017 compared to 2015, suggesting that many of those now counted as out of the labor market would come back if they saw good paying jobs.
If we look at job openings, the labor market does seem somewhat tighter in 2017 than in 2005, but not hugely so. The job opening rate in construction for the first seven months of 2017 has averaged 2.6 percent. That compares to 2.0 percent in the last four months of 2005, but isn’t much different from the 2.3 percent rate for 2006.
But ultimately the question of the tightness of the labor market is wages. While the piece tells us that contractors can’t find workers even when they raise pay, the data suggests they are not very good at offering higher pay.
Percent Change in Average Hourly Wage for Production and Non-Supervisory Workers in Construction
Source: Bureau of Labor Statistics.
As can be seen, nominal wages had been briefly rising at more than a 4.0 percent annual rate, but the pace of wage growth has fallen sharply in the last year to just over 2.0 percent. With an inflation rate of around 1.7 percent, this translates into real wage growth of less than 1.0 percent annually. That doesn’t look like a market with a labor shortage.
For those wondering about levels, the current pay is $26.81 an hour. By comparison, if the minimum wage had kept pace with inflation and productivity growth since the late 1960s, it would be over $19 an hour today. It sounds like the employers cited in the piece are paying even lower wages:
“Ekblom, who runs the Key Largo construction company, said he’s offering between $17 and $20, depending on experience. He’s looking for at least ten more workers.”
This sounds like another example of the widely touted skills shortage. We have employers that don’t know how to raise wages; perhaps more training is the answer.
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