Labor Market Tightening - Could Higher Wages be on the Horizon?

Despite the sluggish economy that has been with us since 2008, there have been periodic complaints from employers about their difficulties in finding employees.  Given the high unemployment rates of the past few years these complaints seemed strange.

In the labor market, employers are the buyers of labor services and workers are the sellers of labor services. With thousands of people out of work, it was only natural for many employers to assume that finding employees would be easy.  Logically this should have been the case and for many employers this probably has been the case.

No one likes to take a pay cut and, for many people, the available jobs being offered were at lower rates of pay than their previous jobs.  For those without any options, their only choice has been to suck it in and take a lower paying job.

However, extended unemployment benefits (sometimes continuing for a year or more), free re-training opportunities, food stamps, a spouse's income and/or savings provide many unemployed people with the means to hang on and hope for a better job opportunity.  While this can' go on forever, it does partly explain why we have both high unemployment and employers complaining about not being able to find workers.

A recent Wall Street Journal article (U.S. Companies Schooled on Wages, Aug 21, 2014) reported that one area that employers are experiencing trouble finding applicants is unskilled labor jobs.  Workers are being sought for unskilled labor jobs in areas like construction and other industries that employ unskilled or low skilled workers

This shortage is difficult to understand given that the segment of the workforce these employers are targeting, which consists of people with a high-school education or less and little or no formal job training, continues to have unemployment rates that continue to be higher than for the labor force as a whole.

A major factor is the fact that the number of unemployed people in the 25 to 34 age group who have a high-school or less education has shrunk to less than 2.6% of the population.  According to the article, this 25 to 34 age group is where employers of unskilled labor draw most of their recruits.  Many of the unemployed in this group qualify for funding for training programs which offer the potential of improving their future job and pay prospects.  As a result many in this occupation group may be electing to continue with their training and not respond to current unskilled job opportunities.

This leaves those in the 25 to 34 age group who are neither working nor looking for work which means they are not considered a part of the labor force.  This is a potential pool of workers that employers can try to induce them to come forward and apply for these jobs.

The best, and possibly the only, way to recruit these people is by increasing the wages being offered.  This will cost these businesses more money.   More money will be needed to  not only attract workers from this group of people who currently not considered a part of the labor force but these employers may also find they have to increase the pay of current workers with some skills who are working at the next level so they do not feel short changed and leave to seek employment elsewhere.

This Increase in Unemployment is Good News for Job Seekers

Reports by the Department of Labor this past month (July 2014) showed an increase in unemployment. However, unlike previous reports, the number of workers losing their jobs was negligible.

Rising unemployment is bad news for the economy and especially bad news for job seekers as it indicates that employers are reducing their workforce rather than expanding and seeking additional workers.

However, as a result of the way the U.S. Department of Labor (DOL) defines unemployment, an increase in unemployment can be viewed on occasion as good news for job seekers.

How is that, you ask?

According to the DOL an unemployed person is one who is both not working AND is actively looking for work.

Once an individual who is not working gets discouraged and STOPS looking for work he or she is no longer officially considered to be unemployed.  For government statistical purposes they are no longer in the workforce and thus in the same class, employment wise, as young children, full time students, retired people, etc. who are not gainfully employed and receiving a pay check.

Thanks to things like savings, unemployment compensation, food stamps, income from a working spouse, etc. many people are able to scrape by without a job. 

These people were not necessarily lazy.  Rather, they simply accepted the reality that there were no jobs available and decided to hunker down and ride out the economic storm.  Also, depending upon the amount of resources (noted above) available for support, many were able to afford to patiently wait for the right type of job to come along - a job similar in pay and stature to their previous position.

The recession also forced employers to become more efficient and able to maintain or increase the output of their goods or services with the same or fewer resources.  However, there are limits to efficiency and at some point expanding output further to meet growing demand requires more resources including labor resources.

Our economy appears to have reached the point where employers are both more confident in the economy's continued growth and face the need to begin hiring again in order to keep pace with that growth.

The result is that hiring has started to increase and as the discouraged workers, who previously stopped looking for work, have begun seeing family members, friends and neighbors suddenly finding jobs, they too are deciding to begin looking again.  Once these previously discouraged workers begin actively looking for work they are considered unemployed once more.

With employers hiring rather than laying off workers the current swelling of the ranks of the unemployed is the result of discouraged workers re-entering the labor force rather than the result of more layoffs.

This is why the recent increase in unemployment numbers that were not accompanied by increases in layoffs is good news for both the economy and for those wanting to work.