The Economics of Labour Shortages

Transcription

1 The Economics of Labour Shortages Dr Andrew Leigh Research School of Social Sciences Australian National University Blog: Web: Melbourne Institute Conference Melbourne University, 28 March 2008

2 A Labour Shortage Crisis? Fear of labour shortages is bipartisan. Australia is facing a national skills shortage, John Howard Addressing Australia's long term skills shortages is vital, Chris Evans Australian industry is facing a severe skill shortage in the coming years, ACTU A key industry group [the AiG] is warning that Australia is heading for severe skills shortages (headline) But (with a few exceptions) academic economists have been pretty silent in this debate. Leigh: Economics of Labour Shortages 2

3 A Labour Shortage Crisis? Why might economists be sceptical about many of the skills crisis prescriptions? 1. Economists typically distinguish shortages (caused by impediments in the market) from labour demand shifts (which affect wages). 2. Skill shortage projections have a bad track record. Leigh: Economics of Labour Shortages 3

4 Copyright 2003 Southwestern/Thomson Learning Shortages are Caused by Price Ceilings (eg. rent control) Price Supply Equilibrium price Shortage Price ceiling Demand 0 Quantity supplied Quantity demanded Quantity Leigh: Economics of Labour Shortages 4

5 Copyright 2003 Southwestern/Thomson Learning Demand Shifts Raise Wages Wage Supply New equilibrium Initial equilibrium D D 0 Quantity Leigh: Economics of Labour Shortages 5

6 Copyright 2003 Southwestern/Thomson Learning Inelastic Supply = Big Wage Rise Wage Supply New equilibrium Initial equilibrium D D 0 Quantity Leigh: Economics of Labour Shortages 6

7 Could a Labour Shortage be Good? In the ageing nations of the first world, the benefits of a labour shortage, in the form of higher productivity growth and higher wages, might outweigh the costs. Where labour is scarce and expensive, businesses have an incentive to invest in labour-saving technology, which boosts productivity growth by enabling fewer workers to produce more. ~ Michael Lind, New America Foundation, writing in the Financial Times in 2006 Leigh: Economics of Labour Shortages 7

8 Could a Labour Shortage be Good? At the time of Federation, Australia had a high capital: labour ratio (aka a labour shortage ). This helped spur innovation in agriculture, and helped keep wages high. Leigh: Economics of Labour Shortages 8

9 Specific Skills Shortages A more nuanced argument is that we can predict future skill shortages. If true, governments can anticipate where wages will grow, and can help prevent bottlenecks. Politicians love the idea that they can predict the future. But in assessing any forecaster, we should look at their track record. How good are demographic projections? Leigh: Economics of Labour Shortages 9

10 How Good Are Demographic Projections? Based on BLS projections for , analysed by Richard Freeman (2006). Leigh: Economics of Labour Shortages 10

11 How Good Are Demographic Projections? The employment and earnings of young workers depends more on macro economic conditions, wage setting institutions, and technological developments than on demography. (Freeman 2006) Globalisation makes projections less accurate. Leigh: Economics of Labour Shortages 11

12 Productivity Matters In the long run, wages will only grow if productivity grows. How to raise productivity? Specific skill projections do pretty badly. The answer is to invest in general human capital: quantity, quality, and equity. This is the right solution regardless of where we are in the economic cycle. Leigh: Economics of Labour Shortages 12

13 Human Capital Investment Quantity There is good evidence that social rates of return are extremely high from: High impact early childhood programs targeted at disadvantaged children (Perry Preschool, Abecedarian Project) Raising the compulsory school leaving age to 17 (forcing children to stay another year raises lifetime earnings by 10% per year) Leigh: Economics of Labour Shortages 13

14 Human Capital Investment Quality As measured by literacy and numeracy scores, Australian schools are doing worse today than in the 1960s and 1970s (Leigh & Ryan 2008). Part of the decline in school productivity may be due to falling teacher quality. The class size/teacher salary tradeoff may have been a mistake. We need education policy to become more evidencebased. Less dogma, more policy experiments. Leigh: Economics of Labour Shortages 14

15 Human Capital Investment Equity Governments do not do enough to target resources to poor children. Public schools in poor areas cannot pay higher salaries, so many good teachers avoid them. The SES funding formula for private schools only applies to half of the private schools in Australia. Very few university scholarships are needs based. Leigh: Economics of Labour Shortages 15

16 Conclusion Labour shortages are inextricably linked to wages, and may in fact promote technological improvements. Because occupational projections are so inaccurate, subsidising today s young generation to enter today s promising occupations may be a mistake. Since wages will only rise if productivity rises, governments should focus on improving general human capital, focusing on quantity, quality, and equity. Leigh: Economics of Labour Shortages 16

17 Further Details Andrew Leigh s details: Web: Blog: andrew.leigh@anu.edu.au Relevant research: Andrew Leigh & Chris Ryan, How and Why Has Teacher Quality Changed in Australia?, 2008 Andrew Leigh, Teacher Pay and Teacher Aptitude, 2006 Andrew Leigh, Estimating Teacher Effectiveness From Two Year Changes in Students Test Scores, 2007 Andrew Leigh & Chris Ryan, How Has School Productivity Changed in Australia?, 2008 Caroline Hoxby & Andrew Leigh, Pulled Away or Pushed Out? Explaining the Decline of Teacher Quality in the United States American Economic Review, 2004 Leigh: Economics of Labour Shortages 17