Thursday, May 10, 2018

Why Wages Do Not Rise In Times of Labor Shortage. The Hairy Fruit Dilemma.

New Zealand is wringing its imaginary hands over the tough problem of how to get more people to work harvesting the national fruit, the kiwi:

Kiwi fruit work is physically demanding, commands minimum wage (NZ$16.50 an hour) and requires workers to relocate on a temporary basis, making it an unappealing employment option for many New Zealanders, including those living on welfare benefits.

Kiwifruit Growers Incorporated chief executive Nikki Johnson said the problem of filling seasonal vacancies forced growers to appeal for government assistance.
Demand for kiwi fruit has surged worldwide - particularly from China - with 19% more of the fruit produced this year and half still waiting to be picked on the vine.

There are 6,000 unemployed people in the Bay of Plenty region, and 1,200 workers needed on kiwi fruit orchards immediately.

Managing director of fruit company Apata, Stuart Weston, told Radio New Zealand raising payrates would not make a difference and the situation was “dire”.

The bolds are mine.

I always enjoy these articles where the employers complain about the heated labor market and the impossibility of finding enough workers at the minimum wage!  Yet these are the very people who have the habit of telling us that wages are low in some industries because of market forces and that wages in general fall during economic downswings, to get rid of the labor surplus.

But when the industry has a labor shortage, suddenly the wage rate cannot rise to fix it!

Note that the demand for kiwi fruit has surged, which means that it could be sold at a higher price.  The simplest market models would predict that this increased demand would result in increased demand for labor to harvest the fruit.  That, in turn, should raise the wages that labor is offered.

But the one managing director interviewed in the above article argues that higher wages would not work.  Rather, the industry wants to use foreign tourists (with government help) as a cheap source of labor.  In short, the industry wants to relieve the shortage of labor by expanding the supply side of the labor market, not by raising the wages.

That would be the best of both worlds for the profit maximization in the New Zealand kiwi industry, sure.

My interpretation of the events is sarcastic, given that we are usually told to worship the free market gods by the powers that be.  But Paul Krugman has proposed another theory to explain the mysterious reluctance of employers to raise wages in order to get more workers:

OK, here’s my theory about the brontosaurus, I mean, about wages. What employers learned during the long slump is that you can’t cut wages even when people are desperate for jobs; they also learned that extended periods in which you would cut wages if you could are a lot more likely than they used to believe. This makes them reluctant to grant wage increases even in good times, because they know they’ll be stuck with those wages if the economy turns bad again.
This hypothesis also explains something else that’s been puzzling me: widespread anecdotes about employers trying to attract workers with signing bonuses rather than higher wages. A signing bonus is a one-time cost; a higher wage, we now know, is more or less forever.
But if it is indeed true that wages tend to be rigid downward, then what good are the simple market models most politicians are still using?