Who says rising wages are bad? — Mike Moffatt

The upside of the skills gap

 
(Photo: Martin Barraud/Getty)

(Photo: Martin Barraud/Getty)

Other than “middle class economics” there was no economic concept that this summer received more press than the “skills gap.” But in so doing, there were a number of misperceptions introduced into the debate that could use some clarification and, yes, challenge.

The Conference Board of Canada led the discussion with a well-researched report titled “The Need to Make Skills Work: The Cost of Ontario’s Skills Gap,” which talks about “looming labour shortages” in some industries, with the possibility of “500,000 skilled vacancies.”

To an economist this talk sounds a bit strange. If quantity demanded outstrips quantity supplied for a good or service, the price of that good or service should rise to the point at which the surplus is eliminated. That should not be a controversial observation. In fact, the Conference Board report itself describes this phenomenon:

A recent analysis from Benjamin Tal of CIBC shows that, nationally, at least 25 occupations are experiencing both “rapidly rising wages and low or falling unemployment rates”—a combination of indicators that points to skills shortages. This group of occupations has an unemployment rate of just over 1 per cent and wages that are “rising by an average annual rate of 3.9 per cent—more than double the rate seen in the economy as a whole.”

I can think of three reasons why these rising wages are viewed as a problem, though two of them are about perceptions rather than realities.

1. Easterbrook’s Law

If labour market pressures are causing unemployment to rise and wages to fall, then naturally you will get stories such as “Study Says Louisiana Faces Stagnant Wages, Rising Unemployment,” “More Britons fall below level of Living Wage” and “Report: 25% Of NJ Struggling To Make Ends Meet.” You would therefore think that, by contrast, labour market pressures that reduce unemployment and cause wages to rise would be heralded as positive developments.  But that’s not how economic reporting works, as illustrated by Easterbrook’s Law, which can be neatly summarized as “all economic news is bad.” Instead of higher wages being presented as a good news story we are told that it indicates a “skills gap,” that rising wages will reduce the “competitiveness” of Canadian businesses and that the economy will suffer.

2. Our typical experience is with downward wage pressures

Wages tend to grow along with the economy, but a number of factors, most notably technological change and globalization, have ensured that for most classes of workers wages have grown slower than productivity gains. We are simply used to downward wage pressures for jobs that can be replaced by machines or someone overseas, with vastly increasing salaries for those who can take advantage of the superstar effect.  Outside of aberrations such as Fort McMurray, we are unaccustomed to thinking about upward wage pressures for non-superstars, so it should not be entirely surprising that we see this as unusual and a problem to be solved.

3. Imperfect labour markets

There is, however, a potentially valid reason to be concerned. The Conference Board report identifies a number of possible labour market imperfections such as workers lacking the information they need to make informed decisions. Certainly our labour markets have imperfections and can be improved, so reforms should be considered. However, couching the discussion in terms of “skills gaps” and rising wages is misguided. We should not be trying to fix market imperfections because they are causing wages to rise; rather we should seek to improve markets and promote economic efficiencies regardless of how the reforms affect wages. Furthermore, we should be seeking out all imperfections, not just ones correlated with rising wages.

I have yet to see any evidence that labour market imperfections can be blamed for the bulk of rising wages, particularly for professions identified by the report such as “account manager” and “financial planner.” We should not fear but rather embrace upward wage pressures as a positive development that raises the standard of living for Canadians.

Mike Moffatt is an assistant professor in the Business, Economics and Public Policy group at the Richard Ivey School of Business, University of Western Ontario.


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