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De Omnibus Dubitandum - Lux Veritas

Wednesday, June 16, 2021

The Labor Shortage Is a Government-Contrived Scarcity

Richard M. Ebeling Richard M. Ebeling  – June 14, 2021 @ American Institute for Economic Research 

Not long ago, my wife and I decided to go out to our favorite Thai restaurant not far from our home in the Charleston, South Carolina area, which we had not been to for well over a year. With so many retail businesses having returned to a no-mask, no-distancing “normality,” we were looking forward to a tasty inside, sit-down meal. But when we arrived we discovered they were still only doing takeout orders because the management had not been able to find enough willing waiters to rehire. America is suffering from an apparent “labor shortage,” in spite of unemployment levels being significantly above what they were before the government-imposed lockdowns and stay-at-home orders in early 2020. 

Before these shutdown orders and restrictions on freedom of shopping were imposed by, especially, the state governments and reinforced by federal policies in March of last year, the economy-wide average unemployment rate hit a low of about 3.5 percent of the labor force in February 2020, according to the Bureau of Labor Statistics (BLS), something not experienced for several decades. Plus, this unemployment low had its counterpart under the subgroups of men and women, whites and blacks and Hispanics, and for adults and youths. Indeed, if the coronavirus crisis had not occurred with the accompanying government-created collapse of much of the economy, 2020 might have turned out to be an exceptionally good year in terms of many of the standard economic benchmarks. 

The BLS June 2021 report on “The Employment Situation” for the month of May showed that the overall unemployment rate stood at 5.8 percent of the labor force, or still about 35 percent higher than in February 2020. And, comparably, each subgroup remains noticeably above their, respective, unemployment rates of 15 months ago. 

At the same time, the BLS’s June 2021 report on “Job Openings and Labor Turnover” stated that at the end of April, job openings for which employers were willing and able to hire stood at 9.3 million positions. But hires to fill employment slots in April totaled 6.1 million. The number of people quitting or not willing to accept work increased, especially in the food service and retail sectors, while the number of workers let go or laid off remained low. 

Unemployment Due to Government Paying People Not to Work

Clearly, to use Keynesian terms, employment in the United States is not suffering from an “aggregate demand” failure. There are plenty of job openings; it is a failure of a good number of employable people not being interested in filling the slots employers would like to fill. Why?

A number of commentators have suggested that many are still concerned about and fearful of returning to the workplace due to the potential of still catching the coronavirus and the risk of serious illness or death. Some have argued it’s because employers are too cheap; that is, they are unwilling to pay a wage high enough to draw unemployed workers back into the active labor force. The problem with this latter explanation is that it does not make clear why wage “x” at which some of these workers were willingly employed 15 months ago is now unacceptable just a little bit more than a year later, given the lost income experienced during all that time. 

However, suppose that before the coronavirus lockdowns and lost employment, a low-skilled employee was making, say, $500 a week. But now let us suppose that during the last 15 months, due to extended unemployment insurance payments and supplementary federal emergency transfers introduced during the coronavirus crisis, this person was continuing to have a government-supplied weekly income of $500, or maybe even more, say, $600. For as long as this continues, what is the incentive for him to return to the workplace for the previous salary when, instead, this individual can stay at home and be no worse or maybe even better off than working his old 40-hour week as before March of 2020? 

A few weeks ago, the Foundation for Government Accountability (FGA) issued a report based on work and wages versus government income-transfer programs (state unemployment insurance, supplemental federal emergency insurance bonus, child care credits, earned income tax credit, and food stamps) in, for instance, the state of Florida. A person could receive up to the equivalent of a $20-an-hour wage by staying home rather than accepting available employment. 

Government Created Artificial Benefits to Not Take a Job

This, obviously, has nothing to do with a “failure of the market” in not providing jobs or from employer stinginess in the salary being offered. Government redistributive benefits have priced some workers out of the labor market by giving them more received income by not working than from accepting the employment available at more market-based wages reflecting employer estimates of those workers’ value-added contribution in various lines of production, including in the service industry.

What has been created by these government programs is a false “opportunity cost” for those in these labor categories in terms of their trade-off between work and non-work. I say “false” due to the fact that if these redistributive programs were not present, lower-skilled workers would have to weigh differently the income forgone by not accepting gainful employment versus perhaps not earning anything. Instead, for as long as these types of programs are in effect, they, basically, establish a “floor” below which more is lost by working than taking a job. 

Even if the government transfers are slightly less than the salary that would be received from working, the trade-off can still be in favor of not taking a job. Suppose someone could earn a weekly salary of that $500 versus unemployment insurance plus some of these other government redistributions that give him the equivalent of, say, $475 or $450 per week. Would it always be in every such worker’s personal interest to give up the $475 or $450 of government-supplied income to, instead, work 40 hours a week to make an extra $25 or $50 for that total of $500 of earned weekly income? Surely, for most people an extra $25 or $50 a week would not be worth foregoing the 40 hours of free time the government money enables him to enjoy. 

Limited Means to Serve Our Many Ends Require Trade-Offs

We can see, therefore, that the current “shortage” of labor is, in fact, “contrived” and not “natural.” I am using this particular terminological distinction because the cause and nature of market-based scarcity versus government-created scarcity was explained with great cogency a long time ago by the British economist, William H. Hutt (1899-1988) in a neglected essay of his on “Natural and Contrived Scarcities” (South African Journal of Economics, September 1935). (See my article, “William H. Hutt: A Centenary Appreciation”.)

Hutt reminded us that man cannot escape from the fact that he is always confronted with the need and necessity to make choices, to accept trade-offs between alternatives, and decide what he values more highly and what he values less highly. The inescapable reason for this is the scarcity of means available in their quantities and/or qualities to serve and satisfy fully all the ends, goals and purposes for which we would like to apply them.

Our time is scarce, with only twenty-four hours in a day. Our mental and physical strength is limited with which to pursue our purposes. The resources and raw materials around us that we identify as “useful things” to make the finished goods and services that we desire are limited in their amounts to produce all the consumer items for which we think them usable. 

In the free market economy, the relative scarcities of both finished consumer goods and the resources, labor and capital equipment out of which those consumer goods can be made are all registered in the form of the competitive prices at which they may be bought and sold.

If we, as consumers, demand more automobiles we may offer to pay higher prices for the greater number of cars we wish to purchase. But to produce more automobiles off the assembly line means that fewer of the scarce resources that go into the manufacture of cars – workers and their labor time, resources, raw materials, component parts, and the machinery needed – will now be available to produce other, alternative goods that could have been produced with those same means of production, instead.

The prices paid to attract those greater quantities of scarce means into the auto industry (including the additional wages to draw more workers into this sector of the market) are what economists call their “opportunity costs.” That is, the prices that need to be offered and paid that are just sufficient to attract them from an alternative employment in which they also have value in producing something else that consumers also want, but not as intensely. 

This is the reality of a world in which we are not able to have everything we want, where we want it, in the full amounts we desire. This is why, no matter how hard we try, we can never “have it all.” Trade-offs are an inescapable part of virtually every aspect of our life. 

Even when through savings, investment, innovation, and industry we succeed over time in increasing our ability to produce more of the things we wish to have, we still never have it all. It is part of the human make-up that as soon as we have successfully reached some desired goals our mind and imagination run ahead to new and different things that are, once again, not fully within our reach.  

It is like walking towards the horizon; no matter how far we go and how fast we try to get there, the horizon remains in front of us, and out of our reach. This is man’s frustration but also the stimulus for all the material and cultural achievements that we call “civilization,” which have raised humanity up from primitive subsistence existence. (See my articles, “Preserved Primitivism versus Freedom and Prosperity” and “Has Modernity Made Us Indecent?”)

The “Natural Scarcity” of Limited Means is Inescapable

In the competitive free market, the limits on how much of goods in general and the relative amounts of each within that total is possible of being produced is limited and constrained by what William H. Hutt defined as the “natural scarcities” existing in any society within any period of time. Said Hutt: 

We must conceive of a society in which there are no restrictions on the free movement, adjustment and full utilization of the productive resources in response to the dictates of consumers’ will [as expressed in their market demands for various goods and services].

Under the “natural scarcity” of things in a free market, some people may wish that more hospitals were built for the sick or more research undertaken for a cure for cancer, or more wildlife areas set aside for peaceful contemplation of the beauty of nature. But the critic has no one to blame but the free choices of his fellow citizens and even himself in actually demanding more of other things in the marketplace that prevents the necessary scarce resources and labor from being available to do more of these other desired things as well. Our own market choices and demands, and that of all of our fellow consumers in society, determine what goods will be profitable to manufacture with what combination of those “naturally” scarce resources, and, therefore, available in which relative quantities in their finished forms as purchasable goods and services. 

“Contrived Scarcities” and “Contrived Plentitudes” Caused by Government

However, the critic may not be satisfied with his own failed attempts to persuade enough of his fellow citizens to demand and spend less on these other things so more scarce resources can be freed up and used for more hospitals, medical research, and nature preserves. He may then turn to the government and its political power to get what he wants without the agreement and voluntary participation of his “preference-misguided” fellows in society. 

Hutt argued that when various individuals and special interest groups turn to the State to get what they want it brings about what he called “contrived scarcities” and “contrived plenitudes.” If the government increases taxes on the citizenry to fund the supplying of more hospitals, cancer research and wildlife areas, it creates a “contrived plenitude.” That is, an amount of these things is supplied in excess of what the market would have found profitable to supply if production had been guided by what consumers would have wanted and demanded if more of their earned income had remained in their own pockets and not been taxed away.

The amount of such “good things” as hospitals, medical research facilities, and nature areas are, in fact, out of balance – over supplied – with what a free market would have supplied of them if the determination of production in society had been left more fully to be guided by the wishes and desires of the income-earning consumers, themselves. 

On behalf of those not satisfied with the free choices of their fellow citizens and who are willing to use political compulsion to get what they want, government has intruded into and violated the “sovereignty of the consumer” to peacefully, honestly, and voluntarily decide what he wants based on his values, beliefs and desires, and to make it profitable on the competitive market for others to provide him with what he wants out of the income he has peacefully, honestly and voluntarily earned in his own role as a producer.  

But the other side of this coin is that there are “contrived scarcities” – a reduced availability – of the goods and services that those sovereign consumers would have been able to have if the greater taxes collected and spent by the government had not resulted in scarce resources and labor being drawn away from producing the goods and services those consumer/taxpayers would have spent their income on if it had not been reduced due to those higher taxes.

“Contrived Scarcities” from Import Tariffs and Price Subsidies

Such contrived scarcities take on various forms, as well, other than only the direct taxing away of people’s income. If the government imposes an import tariff or an import quota on foreign goods entering the domestic economy, the available supplies of those goods will be less; and the prices of these goods that consumers will now have to pay will be higher, as a result, than if free trade was practiced and consumers had had a wider free market choice of domestic and foreign suppliers. 

Suppose that the government starts to guarantee dairy farmers minimum prices for their produce (as the U.S. government does under its farm price-support programs). With a higher guaranteed price than the market-established price, dairy farmers would find it profitable to expand their dairy cowherds; a “contrived plentitude.” But this requires more grazing land for the increased number of cows.

The expanded grazing land will have to come from somewhere. Suppose that this land comes out of wheat growing. The wheat crops will tend to decrease, an essential ingredient in bread baking will be reduced in quantity, and the supply of wheat bread available in groceries may be less, with a resulting higher price per loaf that consumers now must pay; a “contrived scarcity.” 

Thus, government interventions such as these would abridge the market-based sovereignty of the consumers, bringing about too much of some goods being produced and too little of others being supplied. 

Difficulty of Seeing Government’s Hand in Contrived Scarcities

But the perversity from these types of “contrived scarcity” policies is that consumers often find it difficult to know whether and to what extent the supplies available and the prices paid for goods are due to market-determined “natural scarcities” and how much is due to government manipulation of quantities produced and offered on the market.

In the case of the farm price-support programs, consumers in the market end up paying no less than the government guaranteed price for dairy products, for example, since dairy farmers have no incentive to offer it for a lower price on the market since they know that any unsold surpluses at the guaranteed price will be bought up by the government at taxpayers’ expense. 

At the same time, the possible reduced wheat crops that negatively impact the supply of wheat bread and raise its price, for instance, is so many steps away from the immediate vision and understanding of the consumers of bread that it is nearly impossible for ordinary citizens to appreciate the links in the chains of government intervention that has made bread costlier and less available. Thus, the “free market” gets blamed for high or rising prices for various goods because of the apparent businessman’s “greedy profit motive” that makes him fail to produce more of what people want and desire. 

Consumers seem to be unrestricted in their choices concerning how to spend whatever after-tax income may remain in their pockets; market interactions of supply and demand seem to determine the prices that those consumers pay; and, thus, the reason for any frustrating scarcities and expensiveness of desired goods gets placed at the doorstep of “selfish” acts of profit-motivated capitalists and businessmen, in general. 

But behind the scenes the incentive, profitability and opportunity to produce goods guided by the actual demands of the consuming public have been thwarted by government taxing, pricing and regulatory policy manipulations bringing about contrived or artificial scarcities of some goods on the supply-side of the market or wasteful overproduction, or “contrived plentitudes,” of other goods not reflecting what those consumers would really want produced if the market was left free of the intervening and distorting hand of those in political power serving particular special interest groups.

Getting Government Out of the Market Can End Contrived Scarcities

While “natural scarcities” can only be reduced in the longer run through savings, investment, innovation and industry that increase the supply and improve the qualities of desired goods, in principle, “contrived scarcities” and artificial “plentitudes” can be corrected much sooner.

Or as Hutt expressed it, “Contrived scarcities, unlike natural scarcities, are not beyond the power of change by individuals and hence of a different degree of permanence: restrictions can be overcome . . . Contrived scarcities involve, then the frustration of consumers’ sovereignty; and what is usually meant when the removal of restrictions on competition is recommended is that such contrivances shall be eliminated.”

This is the current situation in the American labor market. The government’s income transfer programs such as unemployment insurance payments in general, and the “emergency” income supplements mentioned earlier, have all created a contrived scarcity that the media and others refer to as a “labor shortage.” Yes, labor in a variety of occupations and employments is in short supply, but there is nothing “natural” about it in the manner that Hutt explained a natural scarcity of limited means to serve consumer ends in a free market. 

It is “contrived” shortage of labor due to the government’s manipulation of the trade-off and opportunities costs offered to segments of the labor force through the artificial income supports that have been made available. The other side of this coin is that there has been a government-created “unemployment plentitude;” that is, an amount and level of unemployment in various occupations and lines of work more than would “naturally” exist due to ordinary and ever-occurring dynamic changes in competitive supply and demand conditions. 

A growing number of state governments have announced their decision to opt out of some of these federal “emergency” income transfer programs, meaning the financial benefit of being unemployed will decrease, and the income gains from accepting offered work in the marketplace will seem more attractive. There will remain in place enough government programs that will continue to “contrive” artificial labor scarcities and unnecessary unemployment, including minimum wage laws, small business regulations, occupational licensing restrictions, as well as others. But the type of contrived scarcities of labor created by these particular Covid-related transfers can all be gone practically overnight by simply ending them, and making market-based employment more attractive again, in comparison.  

Educating Others on Natural versus Contrived Scarcities

Finally, in more general terms, one of the tasks of friends of competitive free markets is to explain to our fellow citizens that while a “natural scarcity” of useful means to achieve our various ends is inescapable in the reality of the human circumstance, there are some scarcities of resources and desired goods that are artificial, “contrived scarcities,” precisely due to government and its interventions in the market process. 

Such contrived scarcities, in principle, could be gone tomorrow if the government’s economic policies fostering, creating and sustaining them were abolished and eliminated. The individual’s freedom of choice and action as both consumer and producer will have been more fully restored with a less intervening government. 

Free men in free markets would then be at liberty to improve their conditions without the disrupting and distorting hand of political power and special interest politicking that invariably makes many things less available and more expensive than if competitive markets were unshackled from the government policies that only succeed in making us poorer and far less free than we need to be. 

Richard M. Ebeling

Richard M. Ebeling

Richard M. Ebeling, an AIER Senior Fellow, is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel, in Charleston, South Carolina.

Ebeling lived on AIER’s campus from 2008 to 2009.

Books by Richard M. Ebeling



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