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If employment is so tight, why aren't wages rising?

As economies shift to more domestic production, wages still face downward pressure – unless you can build, install or maintain new technologies.

Someone once said you could teach a parrot economics if you could teach it two words – supply and demand. I’m an economist and I try not to take that too personally, but it’s true that the idea of supply and demand can be applied in many contexts with very useful results.

The basic supply/demand model is simple.

When the supply of any good or service increases, the price goes down. When the supply is reduced, prices rise.

The reverse is true for demand. When demand for anything from electric cars to avocado toast increases, prices tend to rise. When there’s less demand, for gas guzzlers for example, prices usually fall.

This is true for the consumer goods and services that contribute to our material standard of living, like running shoes and restaurant meals. It also applies to the inputs into the production of those final goods and services we want.

One major input into just about everything is labour. And here’s where we start to wonder if all the time we spent plowing through those Economics 101 textbooks was a waste.

Labour is a service and the wage is its price. For most of us, it’s the most important price because we live on the wages we earn. The supply of labour can be measured by looking at the total number of available workers. But more commonly, we just look at the excess supply of workers – the unemployed.

According to the basic supply/demand model, when unemployment is high and there’s an excess supply of workers, there should be downward pressure on wages. On the other hand, when unemployment is low, wages should rise.

A careful search of the media (somehow this never makes the headlines) shows that the current unemployment rate is the lowest it’s been for decades. That suggests extreme labour shortages. Demand for labour is strong with ‘We’re hiring’ signs blossoming in store windows and on truck panels. And businesses are delaying expansion plans not because of lack of capital or customers, but because they can’t get staff.

In these circumstances, according to basic economic theory, wages should be skyrocketing.

And although wages have been stuck for some time, they’re beginning to increase at about a three per cent rate in real terms on both sides of the Canada/U.S. border.

Still, it’s little and late given current labour market conditions. Why haven’t we had larger wage increases sooner?

First, labour is an input wanted not for itself but for the goods and services it can produce. Unfortunately, demand for lattes and haircuts isn’t growing quickly enough to increase their prices. That limits how much employers can increase what they pay their workers and still produce a product that offers enough consumer value for the company to stay in business.

Second, as those dreary economics textbooks remind us, when the supply of anything is reduced and/or the price goes up, substitutes will be found. There are two main substitutes for increasingly expensive North American workers. The first, as we all know, is off-shoring – finding less expensive workers in other countries.

Off-shoring is becoming less significant, since workers in other countries often lack the skills modern industry needs. And many of those nations may not offer reliable stability and infrastructure. Also, with the possible exception of Africa, falling birth rates are reducing the supply of workers around the world.

Another serious substitute for workers is technology. But in spite of what science fiction and some analysts tell us, companies aren’t installing robots in order to kick workers out. Technology is expensive, high maintenance and far from perfect.

Companies are looking for technology because they can’t find workers to haul boxes, pick field crops or deliver meals at any wage that will allow a firm to produce a competitive good or service. It’s not a case of reducing a workforce. It’s finding an affordable means of getting the work done so the entire staff isn’t put out of work if the company shuts down.

But one component of the labour force is in very short supply and will enjoy growing demand.

Just watch wages rise for those who can build, install and maintain the technology that’s increasingly part of our lives.

Troy Media columnist Roslyn Kunin is a consulting economist and speaker.

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