If the solutions were simple, there wouldn’t be problems.
This column is a companion to the WSBS (860AM, 94.1FM) radio show, It’s Not That Simple, on the air every other Friday at 9:05 a.m. Listen to the podcast here.
This is the third part in a series of columns that will look at the housing shortage in Great Barrington. Read the first column here and the second column here. Future columns will look into possible remedies that have been suggested here in the Berkshires and the rest of the country, as well as other ideas suggested by readers.
* * *
Too many people can’t afford housing; there’s no debate about that. It’s Not That Simple has looked at the cost of housing and examined why the free market isn’t working, but cost is only half of the affordability equation. Ability to pay is the other half. This week we’ll look at wages and ask, why aren’t people making enough money to buy the housing that exists?
We began our last column with a quick lesson in the free market, and the laws of supply and demand. Judging by the response we got (almost none) we’re guessing our quick lesson wasn’t quick enough, so here is the world’s shortest Econ 101 lesson. (If you want a more detailed explanation of how supply and demand is supposed to work, Google it.)
- If more people want a thing than there are things, competition among buyers will drive the price up.
- When the price goes up, two things will happen:
A. Fewer people will want it, reducing demand.
B. More people will begin making it available, increasing supply. - Now that demand no longer outpaces supply, the price will come down.
- This is supposed to result in an equilibrium price that enough consumers are willing to pay, and producers/sellers need to charge in order to cover costs and make a profit, so that everyone is happy.
Labor is priced like any other commodity. (We understand that referring to the actual humans who do the work as “commodities, is more than a little offensive.) The buyers of labor, who create the demand, are businesses, which need workers. The suppliers of labor are workers, charging what they need to cover their costs and make a profit. The supply of and the demand for labor should work together to set a price, or wages. The question we are asking today is, why are wages too low to meet the needs of workers?
We invited our favorite economist back to ask him this and other questions. Dr. Daniel H. Neilson is Assistant Professor of Economics at Bard College at Simon’s Rock. You can find his book here and his newsletter here.
It’s Not That Simple: Does supply and demand work for the price of labor as it does for commodities? Can it ever achieve an equilibrium where employers are earning enough profit and wages are high enough to provide for the needs of labor?
Daniel Neilson: We make the assumption that supply and demand can solve a lot of our problems. With labor, it’s really not that simple. The labor supply — the idea that there is a group of people ready to work — misses the fact that many people are at the edge of subsistence in terms of being able to afford their basic needs. They are not in a position where they can withhold their labor. They don’t have a choice. They have to work. Supply and demand doesn’t really play a part when one side doesn’t have a choice in the matter.
INTS: When we spoke about supply and demand last time we said that one of the forces determining demand is the ability of people to say, “I don’t want that thing at that price,” and determining supply is the ability of suppliers to say, “I don’t want to sell that thing for that price.” In other words, the fact that people have the ability to stay out of the market is part of the equation. With labor, often the worker doesn’t have that choice.
DN: Exactly. Work is the way the majority of people provide for their basic needs. Most people do not have a choice to not work. They have to supply their labor. What that means is that they usually do not get a fair deal out of the supply and demand equation. Working people have to take what they are offered. It’s hard to expect that is going to lead to great wages for working people.
INTS: Are we not seeing wage increases today because of a lack of labor supply?
DN: At this point in the pandemic, the unemployment rate, which is the measure of people who want jobs but can’t get them, is historically low. It’s also true that wages have started to rise. That’s not the whole story. Sure wages are rising, but so are prices. If prices are rising faster than wages, people are worse off, not better off.
It’s also true that the job market is good for people who are looking for work, but that is in part because a lot of people have stopped looking for work. The pandemic had two big effects on the labor market. First, many baby boomers went into retirement earlier than they were planning, because of the risks of COVID. Second, a lot of women have left the workforce. So, the big picture is that we have fewer people working now than before the pandemic.
INTS: We’ll get back to the labor shortage in a minute. But first, if the goal of a business is to maximize profits, why would employers pay more than they have to? Is there any guarantee that wages will ever meet the cost of living?
DN: Businesses are trying to make as much profit as they can, and if they raise wages, that lowers profits. So, we can expect businesses to pay workers as little as possible. There are certainly some benevolent businesses that pay more, but there is usually some self interest for the business. This is not to single out any one business owner: the point is that we are in a system in which businesses have to push wages down as low as possible. So we should look elsewhere for a solution to make life more affordable for people.
INTS: Isn’t minimum wage, assuming minimum wage is enough, one of those things outside of the free market system that’s supposed to address that?
DN: Sure, but minimum wage only matters if it pushes wages up. It has to be pretty high to make a difference. Fifteen dollars an hour isn’t going to cut it anymore. We need to be talking about getting wages much higher than that if we want to make a difference.
INTS: But wouldn’t an increased minimum wage increase the cost of everything else? The money to pay higher wages has to come from somewhere, higher prices or lower profits. Why would businesses cut their profits in order not to raise prices?
DN: If you think about what a business does, they sell their product and use that money to pay wages, other costs of production, and profits. It’s a hard conversation to have, because there is inevitably a confrontation between wages and profits.
[See this article in Sunday’s New York Times about rising prices feeding corporate profits rather than increased wages.]
INTS: Let’s talk on a local level. If the coffee shop pays the barista $30/hour so the barista can buy a house in town, they’re going to charge so much for coffee that a lot of us will stay home and make our own coffee. Then stores close and jobs disappear. In a way, the economy is balancing on the backs of low-paid workers.
DN: You’re completely right, the economy is balancing on the backs of low-paid workers. Some of what we are talking about is at the macro level. When we zoom into the coffee shop, it is certainly true that small business owners are in a tough spot, as well. It wouldn’t be easy to raise wages to $30/hr. The problem is the system.
The underlying problem is that access to basic needs depends on peoples’ income. All of the things you need have to be bought with that income. If we could disconnect the cost of housing from the market, so that people could be assured a place to live without balancing it out of their paychecks, it would take pressure out of the wage system. You could think about food or healthcare or education in the same way. The issue is access to those basic needs.
INTS: Let’s talk about labor power: Is the loss of labor power to blame for wage stagnation? What happens when labor achieves power over capital? Has this ever occurred in the United States and what was the result?
DN: This is an interesting question. There have only been a couple of times in U.S. history where labor had power over capital. The one that comes to mind is the labor market that white American men participated in during the two decades after World War II. Because of post-war conditions and the gender structure of labor at the time, men had a lot of jobs available to them when they returned from the war and women left formal labor. This worked very well for white men. They were paid high wages that built a large, solid, white American middle class. This worked well for them, but it left a lot of people behind. Then, starting in the early ’80s, and up to the beginning of the pandemic, wages have stayed the same with regard to the buying power of the dollar. People are now no better off than they were 40 years ago. Working people have not had much bargaining power.
INTS: Where is labor power now? Are we seeing a renewed interest in labor organization, particularly in the retail/food service sector (Starbucks, Amazon, etc.).
DN: Yes. We have seen some successes in organizing. It’s a small scale win, but it is exciting to see. Desperate workers have very little bargaining power, but if they can stand together and insist collectively on receiving a fair wage in exchange for the benefits of their work, they can improve their situation.
We need to figure out how those wins can benefit everybody since we’ve seen that unions themselves can be exclusive. The gains need to be inclusive in terms of race and gender and other differences among people.
INTS: We don’t talk enough about the effect women have had on the workforce.
DN: Gender imbalance in the workplace is definitively something that has not been discussed enough. Because of the underlying gender structures in our society, it is women who have been forced to make decisions about childcare that should instead fall equally between men and women. If we could provide universal childcare that would go a long way.
INTS: There are some who blame women entering the workforce for the loss of labor power. The idea is that when women entered the labor force, there was suddenly a glut of available workers, a greater supply of labor, which drove wages down.
DN: That scenario cannot be blamed on the people wanting to make a better life for themselves, in this case women. It is a fault of the system which is based on gender inequalities. We need to see past putting blame onto people for taking responsibility to improve their own lives, and look at this as a systemic issue that will require solutions at the federal, state, and local level. This connects back to housing, which is a basic need currently provided by the market. So, people have to earn wages to afford housing. The entire system is built on the backs of working people who every month have to make their wages add up to something more than their rent.
INTS: We spoke earlier about the economy depending on the low-wage worker. For much of our history, we could say that worker was an immigrant. Are we seeing any evidence that the labor shortage is related to the recent crackdown on immigration?
DN: That’s tough to answer because there are a lot of questions in there. Right now there is a labor shortage because of retiring boomers and women who have left the labor force.
Historically, immigrant laborers are placed in an extremely vulnerable position, often not fairly compensated for their work. We can’t solve this problem by finding a category of people to work for low wages. That’s not a good answer to this issue. In a way, we are already doing that by paying people in other countries extremely low wages in order to sustain our standard of living. The global division of labor is part of this equation, as well.
INTS: Let’s wrap this up with a question about housing. If housing production accounts for 17.5 percent of GDP and housing prices are increasing, why are we not seeing it reflected in worker wages? A lot of money is pouring into the housing market. Where is it going?
DN: If you follow it through, those higher prices for construction and materials can end up in many places. They can go to the owners of the building-supply companies. They can end up in the real estate transaction itself. What you are getting at is the balance of power between capital and labor. There may be more money in the housing system, but workers do not have the power to bargain for a bigger share. It’s that simple.
* * *
Is there an issue you’d like us to discuss on the show? Do you have comments about this or previous shows? We invite your suggestions of topics that may be of interest and that might seem simple to address. Maybe there IS an obvious solution we haven’t thought of, or maybe It’s Not That Simple.
Email your suggestions or questions to NotThatSimple528@gmail.com, or find us on Facebook.
Listen to our show on WSBS (860AM, 94.1FM) every other Friday at 9:05 a.m.
