The market can solve America’s labor shortage — if Washington will let it

One aspect of the economic crisis caused by the COVID-19 pandemic can be solved best by markets. That’s a recent acknowledgement from a surprising source: The New York Times. 

Times columnist David Leonhardt recently praised the labor market in the U.S. for “its mechanism for dealing with shortages” in a piece titled “The Myth of Labor Shortages.” While he’s wrong that labor shortages are a myth — a common mistake from many pundits and policymakers these days — he’s right that the market can address shortages. The challenge is that the federal government is preventing that from happening. The market can solve America’s biggest current labor problem — too few workers looking for work — if Washington will let it.

Labor markets operate just like any other market: Prices, or wages in this case, adjust automatically based on supply and demand, which works to reduce a shortage. Why? Because prices, when not artificially restricted by governments, provide both valuable information on the relative scarcity of resources and the incentives to employ those resources. 

This basic economic law means that there is a simple solution to the problem of businesses not being able to find enough workers: They can raise wages. Either that or provide other forms of remuneration, such as more flexibility, paid leave or other benefits valued by employees.

So why don’t businesses instantly start paying higher wages? Some argue that wages are historically low and only slowly growing, while corporate profits are high and businesses should be able to afford the costs. But that’s too simplistic. The U.S. actually has seen solid wage growth, and corporate profits do not capture the financial well-being of small businesses. 

What matters most is government policy — especially enhanced federal unemployment benefits that keep more people out of the workforce, limiting the labor supply. It is often the case that shortages result where the government is doing the hiring (teachers and road builders) or with heavy government licensing and regulatory restrictions (doctors, nurses and dentists). Shortages are real but only persistent where government policy makes it harder to alleviate them. This is where America finds itself right now, with a record 9.3 million open jobs yet millions of people out of work.

Rather than limit the benefits that stifle work, many federal and state politicians are calling for workforce development training that targets the so-called skills gap. In Michigan and elsewhere, the government has paid for career and technical education and workforce development in the trades. Unfortunately, in a 2019 report, I found that these programs are largely ineffective. Government intervention in schools and training efforts from high school and beyond are plentiful but are not well targeted toward high-need jobs and don’t do a good job showing true success for the applicants.

Is there a better way to solve labor shortages, or any way at all? The best idea is still plain old supply and demand. When there is a market for more workers in an area, the response is for consumers to pay more for them. In the longer term, when more labor is needed in certain areas, businesses adjust with pay increases and training other workers for those jobs themselves. 

But for that to happen, government involvement needs to be limited. The more that the government does, the harder it is for the market to work and for people to find work. If the government gets out of the way, the result will be more hiring, higher pay, better benefits and improved working conditions. It can’t happen soon enough.

Sarah Estelle, Ph.D., is an associate professor of economics at Hope College and an adjunct scholar with the Mackinac Center for Public Policy in Midland, Mich.