Less labor supply and more labor demand lead to higher wages

We expect price to rise for a good when its supply decreases and its demand increases. This seems to be happening with labor right now.

See Tight Labor Market Returns the Upper Hand to American Workers: Employers competing for low-wage workers are offering signing bonuses and other perks by Eric Morath and Greg Ip of The WSJ. Excerpts:

"Low-wage workers found something unexpected in the economy’s recovery from the pandemic: leverage.

Ballooning job openings in fields requiring minimal education—including in restaurants, transportation, warehousing and manufacturing—combined with a shrinking labor force are giving low-wage workers perks previously reserved for white-collar employees. That often means bonuses, bigger raises and competing offers.

Average weekly wages in leisure and hospitality, the sector that suffered the steepest job losses in 2020, were up 10.4% in May from February 2020, Labor Department data show, outpacing the private sector overall and inflation. Pay for those with only high school diplomas is rising faster than for college graduates, according to the Federal Reserve Bank of Atlanta.

“It’s a workers’ labor market right now and increasingly so for blue-collar workers,” said Becky Frankiewicz, president of staffing firm ManpowerGroup Inc.’s North America operations. “We have plenty of demand and not enough workers.”

Lower-wage employers are boosting pay and offering gift cards to applicants who show up for interviews, along with sign-on and retention bonuses, and sometimes immediate employment before drug screenings and background checks, she said."

"Low-wage workers’ newfound leverage could have staying power—and, in fact, began to emerge before the start of the Covid-19 pandemic. The pandemic pushed some Americans into retirement and convinced others they should return to work only for more pay or improved conditions. Raises that increase base pay to attract workers now will be tough to roll back later, employers and economists say.

Although that bargaining power may be nearing a peak and begin to ease once pandemic-era benefits expire, many economists expect the labor market to remain tight for the foreseeable future."

"Some of the deterrents to work may reverse once the economy fully reopens. Nearly 15 million people claimed unemployment insurance benefits in late May, up from about 2 million before the pandemic. Some may not be working because they receive more from the enhanced unemployment benefits offered during the crisis than they would earn in the available jobs. But those benefits expire in September."

"When unemployment fell below 5% in the late 1990s and again in 2017, wage growth accelerated and employers stepped up recruiting from long-disadvantaged groups."

"The combination of the reopening economy, several rounds of fiscal stimulus and near-zero interest rates could soon recreate the tight labor market conditions that bolstered pay in 2019. Last week, Federal Reserve officials predicted the unemployment rate would fall to 3.5% by the end of 2023, matching its pre-pandemic lows.

Whereas demand for labor drove wage gains in 2019, now both demand and a smaller pool of workers are at play. The share of the working-age population either holding or seeking a job has fallen to 61.6% in May from 63.3% in February 2020—a loss of 3.5 million potential employees. This may have raised what economists call the “reservation” wage, the lowest pay for which someone is willing to work. Workers without a college degree have increased their annual reservation wage to $61,000 from $52,000 in late 2019, according to surveys by the Federal Reserve Bank of New York.

The Dot Foods Inc. distribution center in Williamsport, Md., has raised wages an average of 4% in each of the past four years in an effort to stay ahead of other area employers, including an Amazon warehouse and Target Corp. store, said Brian Duffield Sr., general manager of the center and other East Coast locations. Dot warehouse workers start at $19.25 an hour."