I came across an interesting article from Business Insider which provides a timely reminder of why talk of a “skills shortage” in the labour market is generally bullshit. While it comes from the US, the lessons are exactly the same for Australia:
Heidi Shierholz, former chief economist at the Labour Department, has a great saying when it comes to an alleged “skills gap” in the job market: “If you hear an employer complain they can’t find skilled workers, always ask, at what wage?”
The Business CEO Roundtable has published a report discussing what it says is a shortage of skilled workers in America, and hosted a conference in Washington featuring high profile CEOs, a top aide to Donald Trump and two US senators.
“There are a lot of jobs open,” said Jamie Dimon, CEO of JP Morgan, during a panel discussion sponsored by the pro-industry lobby. But “there are a lot of people who are not properly trained,” he maintained.
But is there really a skills shortage? If so, why have median wages been stuck in a rut for so long? Why aren’t companies investing more in training and labour-saving equipment? Why aren’t they asking workers to work longer hours? It doesn’t add up, says Dean Baker, co-director of the Center for Economic and Policy Research, a liberal think tank in Washington.
“We want better educated people but that’s not the thing holding back the labour market right now,” Baker told Business Insider. “It’s an incredible cop out”…
Michael Madowitz, an economist at the Center for American Progress, says he is “unusually unsympathetic to the evergreen skills gap critique.”
“First the Econ 101 ‘pay more for more if you want more’ cuts against this well in a period of little wage growth,” Madowitz said. “Second, there’s fascinating/depressing empirical research showing a ‘skills gap’ occurs because employers add and remove qualifications for the same job postings depending on the labour market, ensuring there is always a skills gap.”
Back in June, Fairfax’s Michael Pascoe penned a great article explaining why ‘skilled’ temporary work visas would continue to be rorted by employers in Australia irregardless of the Turnbull Government’s recent reforms to the 457 visa system, which drew on the same themes:
..here’s how to rort the 457 temporary worker visa system and whatever the government renames it.
Let’s use an example of, say, refrigeration mechanics. This is a skilled area in demand…
There is an award for the job, but nobody with the skills works at the award wage – they’re better paid thanks to the demand for their services.
So Dodgy Brothers Refrigeration advertises for refrigeration mechanics at the award wage and, surprise, surprise, receives no local applications.
Under both the existing and proposed systems, this means Dodgy Brothers can charge ahead and hire foreign workers, perhaps in theory paying them the market rate, but more likely the award or the minimum guest worker salary ($53,900 a year – and it hasn’t changed since 2013). In any event, it’s a good deal less than the labour costs of the competitors genuinely competing in the local jobs market.
Dodgy Brothers gains an unfair advantage over its competitors. It also keeps a lid on refrigeration mechanic wages instead of escalating them to the extent of attracting more people to do the training to join the skilled trade.
And this example is why the government’s rebranded 457 visa scheme falls short.
No, you can’t trust employers to do their own labour market “testing”…
Pascoe usefully identified the key shortcoming of the Turnbull Government’s reforms to the 457 visa system: they left the appallingly low pay floor of $53,900 (non-indexed) in place.
Ridiculously, this pay floor is some 35% below the average full-time salary of $82,789, which of course includes unskilled workers.
By maintaining such a low pay floor for temporary ‘skilled’ foreign workers, the Turnbull Government has ensured the system will continue to be overused and abused by employers, and will continue to undermine the pay and working conditions of local workers.
As noted by The Australia Institute’s (TAI) chief economist Richard Denniss back in April, higher wages should drive productivity growth, but when firms are allowed to hire cheap labour from overseas, they have less incentive to train workers nor invest in productivity-enhancing labour saving technologies:
…the purpose of 457 visas is to suppress wage growth by allowing employers to recruit from a global pool of labour to compete with Australian workers. When demand for workers rises, employers need to bid against each other for the available scarce talent. It is only in recent years that the wage rises that accompany the normal functioning of the labour market have been rebranded as a “skills shortage”.
When demand for petrol rises on the Thursday before a long weekend, it would be rare to hear it called a “petrol shortage”. The petrol stations receive a windfall profit, the customers get grumpy, and that is pretty much how capitalism works.
The increase in price that accompanies an increase in demand is inevitably good for sellers (like workers with rare skills and petrol stations) and bad for buyers (like employers and holiday makers). But the existence of higher prices is not, in itself, evidence of a problem. Indeed, economists would usually argue that such price rises often increase economic efficiency.
The first efficient function of high wages, or high petrol prices, is that it helps to ration something scare. Those employers who value the skills the most, and those drivers with the least petrol in their tank, will pay the higher prices while others will choose to wait or find an alternative. This takes some heat out of the market.
The second thing economists like about high prices – for wages or petrol – is that, if they are expected to stay high, people will find, or invest in, ways to use less of the scarce resource. That is why high wages boost productivity growth; they give employers an incentive to invest in better processes, machinery and training.
It’s not an accident that more machinery and fewer shovels are used to build roads in Australia than in developing countries. Because we have higher wages, rational road-building companies invest in bulldozers and graders rather than recruit huge teams of labourers. If Australia wanted to “create jobs”, we could ban bulldozers. But while lowering the productivity of construction workers would boost employment in the short term, it would do nothing to boost living standards in the long term.
The third, and possibly most important, benefit of high wages and high petrol prices is that they have the potential to encourage new workers, and new petrol stations, to enter the market. If a “skills shortage” leads to a boost in wages for plumbers or aged-care nurses, the most likely response is for the higher wages to attract more people into the industry. Similarly, firms that want to avoid “skills shortages” could do something old-fashioned like train up their workforce of tomorrow…
So here we are in 2017, one of the richest countries in the world scouring the developed world for people with the skills that our employers (unlike employers in India, the Philippines or Bangladesh) “can’t afford” to provide.
The truth is there are no widespread ‘labour shortages’. Just a shortage of ‘skilled’ people willing to work at appallingly low rates of pay.
For a government that is now supposedly concerned about poor wages growth, raising the pay floor on temporary skilled workers from the appallingly low level of $53,900 (non-indexed) would be a good start.
