I have heard so many news reports over the past few years about how tight the labor market is, yet employers are not raising wages. Here is my theory for one cause; I call it "Wages and Employment are Sticky, but Employees Do Tend to Expect Internal Equity".
Let's say you have 100 widget builders, their hourly rate is $12/hour. Demand is high, you need 15 more widget builders to meet demand. However, the labor market is tight, you aren't finding candidates at $12/hour. Based on some experimentation, you conclude that in order to attract those incremental employees, you need to offer a 10% premium to the current wage, or $13.20/hour. Given strong demand, you have pricing power (no discounts) and equipment utilization is excellent, so even at $13.20/hour, those incremental employees will be profitable.
Except--what about your 100 existing employees? They are experienced and loyal. If you are taking people in off the street at $13.20 per hour, don't the existing employees deserve at least that much?
And therein lies the problem. "Buying" incremental labor is not like buying incremental raw materials. Raw materials don't expect internal equity. In the above case, the incremental hourly cost, idealized to ignore internal eequity, would increase by 16.5%. But if we factor in the need for internal equity, it goes up to 26.5%--making additional employees much more expensive, and exerting far more pressure on profitability.
I'm not a trained economist, but that is my theory. I don't claim that it is a complete theory. For one thing, the same principle would apply over the ages--hardly unique to our time. Still, it seems I am surprised that I never hear this argument explored, in the innumerable news reports I have heard on this topic.
Let's say you have 100 widget builders, their hourly rate is $12/hour. Demand is high, you need 15 more widget builders to meet demand. However, the labor market is tight, you aren't finding candidates at $12/hour. Based on some experimentation, you conclude that in order to attract those incremental employees, you need to offer a 10% premium to the current wage, or $13.20/hour. Given strong demand, you have pricing power (no discounts) and equipment utilization is excellent, so even at $13.20/hour, those incremental employees will be profitable.
Except--what about your 100 existing employees? They are experienced and loyal. If you are taking people in off the street at $13.20 per hour, don't the existing employees deserve at least that much?
And therein lies the problem. "Buying" incremental labor is not like buying incremental raw materials. Raw materials don't expect internal equity. In the above case, the incremental hourly cost, idealized to ignore internal eequity, would increase by 16.5%. But if we factor in the need for internal equity, it goes up to 26.5%--making additional employees much more expensive, and exerting far more pressure on profitability.
I'm not a trained economist, but that is my theory. I don't claim that it is a complete theory. For one thing, the same principle would apply over the ages--hardly unique to our time. Still, it seems I am surprised that I never hear this argument explored, in the innumerable news reports I have heard on this topic.
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