How Wage Increases Can Sometimes Increase Employment
A New York Times article claims that as unemployment in Germany has reached the lowest level since 1992, it now suffers from the opposite problem of labor shortages.
But first of all, at 7.4%, unemployment is still significantly above the level of unavoidable frictional unemployment. Labor markets have functioned with unemployment rates more than 5 percentage points lower, so there is no general labor shortage yet.
It could however be the case that a few sectors suffer from a shortage of workers with the right skills, even as unemployment is high in other sectors. The best solution to this is to educate the unemployed in other sectors so that they can work in the sectors which suffers from shortages. Encouraging older workers in the sectors with shortages to stay on the job longer and removing restrictions for foreign workers with the right skills in those sectors would also work.
Amazingly, the article overlooks the most obvious and effective solution to labor shortages, which as it happens would help (that of course, doesn't mean that one can't use other ways to achieve these solutions) with regard to all the three solutions discussed the previous paragraph: higher wages.
As in any market, a shortage is a sign that the price, in this case the wage level, is too low. Raising pay in sectors with shortages would encourage people to get the needed education to work there, it would encourage older workers to stay on longer and it would encourage foreign workers with the right skills to move to Germany (though in most cases they would have to educate themselves too, only in this case in the German language).
But some employers in the sectors might object by saying that they can't afford to raise wages. But if they can't pay enough to get workers, then their business isn't efficient and shouldn't survive. In that case it is better if other employers, whether in Germany or elsewhere take over production.
Remember, a higher price doesn't just help achieve equilibrium by increasing supply, but also by reducing demand, in this case the demand for workers from inefficient employers.
I have frequently argued that wage cuts will reduce unemployment, but it is just as true that wage increases will reduce labor shortages and therefore increase employment. Thus if employers in some German sectors can't find the right workers then it should be clear that they should offer workers better pay. And if they can't afford it or pass on these increases to their customers, then they aren't efficient enough.
But first of all, at 7.4%, unemployment is still significantly above the level of unavoidable frictional unemployment. Labor markets have functioned with unemployment rates more than 5 percentage points lower, so there is no general labor shortage yet.
It could however be the case that a few sectors suffer from a shortage of workers with the right skills, even as unemployment is high in other sectors. The best solution to this is to educate the unemployed in other sectors so that they can work in the sectors which suffers from shortages. Encouraging older workers in the sectors with shortages to stay on the job longer and removing restrictions for foreign workers with the right skills in those sectors would also work.
Amazingly, the article overlooks the most obvious and effective solution to labor shortages, which as it happens would help (that of course, doesn't mean that one can't use other ways to achieve these solutions) with regard to all the three solutions discussed the previous paragraph: higher wages.
As in any market, a shortage is a sign that the price, in this case the wage level, is too low. Raising pay in sectors with shortages would encourage people to get the needed education to work there, it would encourage older workers to stay on longer and it would encourage foreign workers with the right skills to move to Germany (though in most cases they would have to educate themselves too, only in this case in the German language).
But some employers in the sectors might object by saying that they can't afford to raise wages. But if they can't pay enough to get workers, then their business isn't efficient and shouldn't survive. In that case it is better if other employers, whether in Germany or elsewhere take over production.
Remember, a higher price doesn't just help achieve equilibrium by increasing supply, but also by reducing demand, in this case the demand for workers from inefficient employers.
I have frequently argued that wage cuts will reduce unemployment, but it is just as true that wage increases will reduce labor shortages and therefore increase employment. Thus if employers in some German sectors can't find the right workers then it should be clear that they should offer workers better pay. And if they can't afford it or pass on these increases to their customers, then they aren't efficient enough.
posted by stefankarlsson at 5:49 PM
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