Idaho’s labor shortage should boost pay, especially as labor-force participation drops

Idaho’s “official” unemployment rate is 3.8 percent. That is a full 1.1 points below the national rate and lower than many other states. The Boise metropolitan area beats the state average with a 3.6 percent jobless rate.

Folks, you have to realize that, from the point of view of society as a whole, this is about as good as it gets.

I know that will draw angry emails about how the economy is in terrible shape or that the unemployment numbers are cooked. Aggrieved employers will complain there are crying shortages of good workers. These assertions are not new and are given over wide ranges of labor market numbers.

Start with a purported labor shortage crippling businesses, especially those with many low-skill workers. Yes, these now find it harder to hire workers at wages they want to pay.

Economists bridle at the word “shortage” in relation to efficient markets, like labor. Their reaction is, “Are you sure the market won’t clear at higher wage rates?” With better pay, wouldn’t they get more workers?

Note that this is not limited to dishwashers. One periodically hears of shortages of nurses or teachers. Both professions are ones with many people who have requisite training and experience but are not currently working in that field. Surveys indicate that many would return if pay was higher. So, as with low-skilled workers, an economist’s first reaction to any employer complaining of a teacher or nurse shortage is: “Pay more!”

Admittedly, that is not easy in many cases. Food service is very competitive. If the owner of hot-dog cart has to pay higher wages and thus raises prices, she may lose business to other eateries. A school may need a higher levy to boost its pay scale — which often is in union contracts. And any business that faces import competition always must compare its labor costs with those of foreign competitors.

Individual employers think, “I can’t pay higher wages and make a profit.” But when an entire sector faces higher market wages, every comparable business is in the same boat. Food sellers of all types faced this in the past, and prices rose without business dropping.

So economists’ advice to employers would be: If market wages are rising, pay up or do without wanted workers.

And they would note that while inflation-adjusted wages now are rising, they were nearly flat for years.

Stepping back from individual workers and employers, why are market wages rising? Is it supply — the numbers of people willing to work at each of a series of different wage rates? Or is it demand — the numbers of workers employers are willing to hire over the same range? Are more entities, public and private, trying to hire more people? Or has the number of people looking for work dropped?

British economist Alfred Marshall famously said this is like asking if the top blade or bottom blade of a scissors cuts the cloth. Both supply and demand always are in play. But when equilibrium wages and the overall number of potential employees change, one can look at causes.

There obviously is an increase in demand. National output is growing at the fastest rate in years. Idaho’s economy has been expanding faster than many other states’ economies. So companies seek workers, and the number of employed people grows.

However, things clearly are happening to supply. While Idaho’s labor force is still growing, the labor force in my home state of Minnesota has shrunk since early spring. This is the number of people who have jobs or are actively looking for jobs. Take this number of people over age 16 divided by the total population and you get the “labor force participation rate.” Idaho’s rate, and the nation’s, have been dropping from levels that prevailed for several decades. Why?

The retirement of baby boomers is one reason. The most common reasons for being “out of the labor force” are retirement, going to school or staying at home caring for children. But participation among people 65 and older is actually rising. Meanwhile, if one looks at “age-specific” rates for brackets from age 16 to 65, there are declines in these groups, especially for males. And there is no clear reason why.

Are more younger potential workers rich than in previous generations? Or do they live in parents’ basements, playing video games? Are more simply lazy and willing sponge off friends and family? Are fewer high school and college students also working?

People who don’t have jobs and get tired in a fruitless search for work — “discouraged workers” — are not counted as unemployed if they did not take active steps to get employment. They are “out of the labor force.” They don’t show up in the “U3 unemployment rate,” the one most commonly cited. But they do show up in a broader “U6 rate” also tabulated each month. They are more common when the economy is declining and unemployment rates are high. They tend to decline as job markets pick up. The gap between the U3 and U6 rates narrows. Yet the opposite has been happening this year, even as output and overall employment has risen and unemployment rates have fallen.

This is an immediate concern here, but changing patterns in participation are a deeper and longer-term issue for our whole nation. I will explore these patterns in a future column, including why they rose decades ago and how our economy will be affected if current lower levels persist.

This story was originally published December 9, 2016 at 4:11 PM with the headline "Idaho’s labor shortage should boost pay, especially as labor-force participation drops."