Guest Column

Low wages are major impediment to labor supply

January 16, 2015
| By Lou Glazer |
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Gov. Rick Snyder has made clear that one of his top priorities is career technical education for the skilled trades, particularly in construction, manufacturing and agriculture.

He created a new super agency — the Department of Talent and Economic Development — to deal with the problem. And he is pushing for a re-emphasis on vocation programming in high schools.

The assumption seems to be that government is the prime cause of labor shortages. If only government — largely through the education and training system — were more aligned with the needs of employers, there would be no labor shortages.

One problem: If there are skilled trades labor shortages, the prime cause is not an education system that overemphasizes four-year degrees, but employers’ unwillingness to raise wages. In market economies — which we all claim to believe in — price is what brings supply and demand into equilibrium. In labor markets, price is wages.

So if there is more demand for workers in an occupation than supply, the way you get more supply is by raising wages. (And other ways to make an occupation more attractive to job seekers: better work conditions, better benefits, not hiring through temporary agencies, more job security, etc.) Yet in most of the occupations where politicians and employers are complaining about labor shortages, wages are not going up.

A terrific 2012 New York Times Magazine article by Adam Davidson entitled “Skills don’t pay the bills” argues that low pay is the main cause of those unfilled jobs, not a skills shortage.

Davidson writes: “‘It’s hard not to break out laughing,’ says Mark Price, a labor economist at the Keystone Research Center, referring to manufacturers complaining about the shortage of skilled workers. ‘If there’s a skill shortage, there has to be rises in wages,’ he says. ‘It’s basic economics.’”

Low wages are a major impediment to labor supply in West Michigan. As Birgit Klohs, Right Place Inc. president and CEO, recently said: “West Michigan happens to be on the very low end of what we pay. If we don’t pay, people will go elsewhere. If we want to have talent, we’re going to have to pay for it.”

Add to lower wages the fact that manufacturing and construction skilled trades have seen mass layoffs for years. There may be more demand for workers today than jobs, but this comes after a long period of far more supply than demand. It’s hard to attract young workers to occupations who grew up in households where fathers and older brothers in those occupations have been laid off repeatedly or have lost a job and never found another in the occupation.

Davidson continues: “(Eric) Isbister (CEO of GenMet, a metal-fabricating manufacturer outside Milwaukee) is seeing the other side of this decision making. He was deeply frustrated when his company participated in a recent high-school career fair. Any time a student expressed interest in manufacturing, he said, the parents came over and asked: ‘Are you going to outsource? Move the jobs to China?’ While Isbister says he thinks his industry suffers from a reputation problem, he also admitted his answer to a nervous parent’s question is not reassuring. The industry is inevitably going to move some of these jobs to China, or it’s going to replace them with machines. If it doesn’t, it can’t compete on a global level.”

So how do you effectively deal with skill shortages? In a recent article entitled “The Tech Worker Shortage Doesn’t Really Exist,” Bloomberg BusinessWeek writes: “For a real-life example of an actual worker shortage, (Hal) Salzman (professor of planning and public policy at Rutgers University) points to the case of petroleum engineers, where the supply of workers has failed to keep up with the growth in oil exploration. The result, says Salzman, was just what economists would have predicted: Employers started offering more money, more people started becoming petroleum engineers, and the shortage was solved.”

Lou Glazer is president of Michigan Future Inc.

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