Arnold Kling  

Basic Supply and Demand

Comment of the Week, 2003-04-2... Trading with Weasels...

Reading this story about unemployment among computer programmers left me feeling amused and vindicated.

"This is the worst I've seen," said ... an out-of-work systems integration analyst, who has been involved in the tech industry since 1974. "I'm running into people who have been out of work a year or a year and a half. It's definitely an employer's market out there."

I feel vindicated, because the second online economics essay that I wrote, in December of 1997, said that the Commerce Department was wrong to forecast a persistent "shortage" of technical workers.

Now we are ready to pose the question for our first-year economics students: describe the new equilibrium in an economy in which the supply of labor falls and the supply of capital increases.

The answer, of course, is that the wage rate increases and the rate of return on capital declines. At higher wages, people will supply more labor (although perhaps not much more), and firms will demand less labor. With these market mechanisms working, there will not be any shortage.

Fortunately, a foolish prediction of a 20-year labor shortage probably will not cause the staffing industry to make any mistakes over its relevant time horizon, which probably is closer to 20 days. More ominous are the rumblings from the Department of Commerce, which recently published a study purportedly showing that the U.S. faces a future scarcity of skilled labor.

The prediction of a skilled labor shortage gives one the feeling that we are being softened up for some foolish policy initiatives: perhaps a crash program to develop "synthetic nerds," or maybe an underground facility to store network engineers as a "strategic reserve."

Today, evidently, the shortage of technical workers has changed to an excess. This too, shall pass. Demand will improve, and/or wages will adjust downward.

Labor markets adjust slowly, because there are costs to both employers and employees of making and breaking new arrangements. But eventually they do equilibrate.

(Just to be clear: I am not amused or in any way pleased by someone else being out of work.)

For Discussion. What other factors affect the speed of adjustment of labor markets?

Comments and Sharing

CATEGORIES: Microeconomics

COMMENTS (7 to date)
Eric writes:

While I have faith that over time market mechanisims do work in the employment sector, as in every other sector, there IS one area that is troubling.

Technical fields require employees with technical training. Where do these people come from when our public school systems are too busy teaching kids to put condoms on banannas to teach math and science?

In the 1990s, they came from China and India, where evidently the schools actually teach relevant subjects.

In the 21st Century so far, the jobs themselves seem to have moved to China and India.

My concern has never been a shortage of American computer programers, which can be easily outsourced to India. My concern has been and is a shortage of skilled trades, like plumbers and carpenters. Another problem with our public school system is that it is much too skewed towards preparing kids for college, even kids for whom college is a bad fit. The trades suffer as a result.

Of course, even here, immigration helps. The trades in Chicago are full of Mexicans and Polish.

Chris writes:

Have you seen what the H1B program has done to our industry? Read up on that before we discuss supply and demand. The demand is there, but the supply is artificially inflated by the H1B program which exploits these workers, and screws the average American IT worker.

Who benefits from H1B? It isn't me....

Scott writes:

As the IT world became more specialized, its labor market became more segmented. Specific knowledge and experience was and still is required in every area. This makes moving labor within IT difficult and moving the labor out of IT even more so.

Lots of retraining is required. That slows down the labor force transition to a crawl.

Chris writes:

The guy that installed a door for me last month made about $100 for an hours work - and he is self employed. If he is as busy as he claims, he is making a very nice living. We can't even get landscapers to call us back - they are all booked weeks or months out. I don't know if its a shortage of supply or temporary blip in demand, but it sure seems like there is a lot of money to be made in the traditional skilled trades.

What do you think is the impact of the

a)increased immigration of techies into the US, esp via the H1-B program and
b) the growth of offshore IT outsourcing

on the IT labor market in the US?

How do you see this playing out over the next decade?

scott writes:

I was talking with the Executive Director of my alumni association this afternoon. He notes that none of the current class of computer science graduates has a job offer as yet. In contrast, each of the Petroleum Engineers has an average of seven. The school has a 4-6 year pipeline for graduates in each department. Students tend toward those departments that have good offers for their graduates when the students enter the program.

This would indicate at least several years worth of lag in responding to a changing labor market.

Anita writes:

I can't believe there can be unemployment among computer programmers. They will always have a job if they combine their skills with creativity.

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