source: tradingeconomics.com
I think there’s something missing from Caroline Baum’s analysis at MarketWatch of the apparent inconsistency between the low labor force participation rate and the increasing number of jobs on offer:
Businesses do not bid up the price of labor (wages) only to find their profits squeezed, forcing them to raise prices. That is just not how it works. Labor is the largest input cost, especially for service-providing industries, so firms carefully weigh the cost of adding the marginal worker versus the marginal revenue he will produce.
A more compelling argument to explain the large number of reported job openings going unfilled is that demand isn’t strong enough to support economy-wide price increases. Without price increases, higher wages are off the table. All those “help wanted†signs in store windows should probably read “help wanted at a price.â€
Let me try to fill in the blanks. Large businesses have a confidence based on experience that, if they kvetch long and loud enough, they’ll get the H-1B visas they want to bring in foreign workers at wages below what would otherwise be the market clearing price of labor. That’s what the discrepancy really tells you. The wages that are being offered are below the market clearing price of labor.
If profits are low enough for long enough, one of two things will happen. Either businesses will close their doors or they’ll get used to lower returns on investment. That’s what I think has happened. For decades businesses have been receiving what would previously have been considered an unusually high rate of return and they’ve gotten used to it. Note how low capital investment has been for so long.
The graph at the top of the page illustrates business investment as a percentage of GDP. A longer series going back to, say, 1980 would make the case even more dramatically. In other words the decrease is not just because of the Great Recession. It’s been going on for some time.
Just some thoughts. Trivial to more important.
“. Labor is the largest input cost……”
Not in manufacturing.
” especially for service-providing industries”
Only in services, really.
“so firms carefully weigh the cost of adding the marginal worker versus the marginal revenue he will produce.”
Marginal value. And….of course.
“demand isn’t strong enough to support economy-wide price increases. Without price increases, higher wages are off the table.”
A point I’ve been making for a long time, especially in minwage discussions.
“H-1B visas ”
I just don’t understand the focus here. Jobs on offer of 5.8mm. Jobs taken of 5.5mm. Non-participants measured in millions. (Recent figures). H1-B visas, regular and master: 85,000. ???
“Either businesses will close their doors or they’ll get used to lower returns on investment.”
Get used too? It will do everything it can to go elsewhere; it will be returned to investors; it will be malinvested (say, in bubbles; or regulatory compliance); it will go to automation. It won’t go to growth. But why worry? Business didn’t create that. Someone else did that and will……………..right? Right after Godot arrives.
Personally, I think the mismatch is primarily a combination of skills and attitudes mismatch, insufficient economics and safety net alternatives.
The HiB number tis misleading. In theory we get to have 85k new workers every year. In reality there are no limitations on the number for academic positions, and this excludes F-1 and J-1 workers, plus a number of other alphabet smaller groups. Estimates i have seen put the true number over 200,000. Plus, HiB visas can be greatly extended. Importantly, this is just the legal aliens. You forget about the illegal aliens businesses can sign to save money.
Dave- Does that graph include investment in employee training? That has also drooped way down. Corporations don’t want to pay market wages anymore AND they don’t want to have to pay to train anyone. They had years of record profits but they weren’t investing any of that.
Steve
Also, L-1 visas are widely abused. An L-1 visa is a visa issued to “key personnel” of a foreign company doing business in the United States. There is no limit to the number of L-1 visas issued. Although such personnel are not supposed to be contracted out, that’s largely ignored. So, for example, let’s say
Infosysa company that shall remain nameless hires workers inIndiasome other country, brings them to the United States, and contracts them out toDisneyanother company that shall remain nameless. They’re able to do that in unlimited numbers.GDP = C + BI + G + (X – I) where
C is personal consumption expenditures
BI is business investment (basically, all business spending)
G is government spending
X is exports
I is imports
The graph depicts BI as a percentage of GDP.
Thanks. I didn’t know about L-1 visas. In the process of recruiting I have learned more about others, but since we are not a multinational, cannot use that trick. (Have yet to hire anyone on a visa, but get a lot of interest.)
Steve
I certainly wouldn’t quibble with 200,000. The point is the same. More likely, in my opinion, the h1b issue is a variant of skills mismatch.
In technology not a chance. I’d say that in technology it’s 90% cost reduction.
Yeah, I just read the L-1 point. So one comes full circle. Is it simple margin seeking or inability to pass costs through to consumers?
Does anyone have a real handle on the ratio of H1b or through the back door L1 salaries vs domestic, or the typical total margin impact? This is simply not something that drives smaller enterprises. In any event, looks like another case of paid and bought pols and policy.
“Is it simple margin seeking or inability to pass costs through to consumers?”
If we also saw the salaries of management dropping or stagnant, I would suspect an inability to pass costs. That does not appear to be the case, which doesn’t mean it can’t still be costs, but it may favor margins.
“This is simply not something that drives smaller enterprises.”
Yup. It is set up so that only multinationals can do this. Another case of, I suspect, regulations being written by large corporations for their own benefit.
Steve