The Talent Shortage Fallacy (or, why aren't wages growing?)

Henry Ford raised the salary of his workers so they’d be able to buy cars. Although this decision risked lowering profits temporarily, Ford took the long bet, assuming the move would lead to a more sustainable business and economy over time.

It did. By 1916, profits doubled and sales soared, making Ford a happy man. By 1921, half the US car market belonged to him. Other companies followed suit, revolutionizing an industry.

NPR reported that in June, employers added 213,000 workers to their payrolls, and that over the last 8 years, averaged at least 180,000 new jobs a month. They further reported that employers consistently decry a talent shortage -- the labor market so tight they simply cannot find the workers.

But something is askew here. Basic economics dictates that during a labor shortage, wages should rise. This increases competition and the chance that you'll be able to fill that "difficult-to-hire" position.

Recent reports show this is not the case. Not only are wages not growing as expected -- 2.7% since June of last year -- they are barely keeping pace with inflation (reported at 2.3%).

Which begs the question: if we have a talent shortage, why are wages not increasing?

The simple answer might be: because employers don't have to raise them. Or because of the stimulus, or corporate tax cuts. Pay people less, increase the bottom line, right? Henry Ford didn't think so, and neither do many economists today. By not raising wages, they are working against themselves in two ways: they lessen the likelihood of acquiring and retaining the talent they need to stay competitive, and they leave people with less money in their pockets to buy products and contribute to the economy overall.

While this scenario impacts people across the board, it becomes disproportionately more difficult for those on the lower end to keep up (and amass wealth). In fact, average wages are falling for certain groups. According to the Wall Street Journal, "production and nonsupervisory employees, a category which includes blue-collar workers, saw their real average hourly wages fall 0.2% in June from a year earlier after a similar slip in May."

How much are workers benefiting from this economy? It is hard to tell. As discussed in my previous post, "Will the Real Economy Please Stand Up?", economic health indictors such as low unemployment, a booming stock market and GDP growth provide a good estimate as to how the economy is faring. But these measures work in aggregates and lack context -- the true status of the labor market becomes clear only when digging within.

The WSJ did just that:

“'It’s the boiling-frog metaphor,' said Marc Hall, a 58-year-old writer and corporate-communications specialist at a software firm in Rockville, Md. 'You notice it [inflation] a little at a time, here and there, and then at the end of the year, you say, ‘Yeah, things went up a lot, didn’t they?’'

Mr. Hall said that while he received a 2% pay raise in the past year, he senses that his earnings haven’t kept up with the cost of living, adding, 'It’s a net loss.'"

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