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Minnesota’s ‘labor shortage’ offers the opportunity for higher wages

Minnesota’s unemployment rate was 3.0% in July, comfortably below the national rate of 3.9%. Our state’s Labor Force Participation rate, 70.5%, is below that of only the District of Columbia.

What this means has been a subject of some debate in the state. There are those who warn of looming labor shortages. If employers cannot hire workers, businesses will not be able to expand, we are told.

Economics offers one way for employers to beat this trap; pay more in wages. As I’ve written before, when people talk about a ‘labor shortage’ what they really mean is that demand for labor is greater than supply at the current price. At some higher price, wages in this case, supply and demand will reach equilibrium. As Minneapolis Fed President Neel Kashkari put it, “If you’re not raising wages, then it just sounds like whining”

Some employers are doing just that. With the holiday hiring season approaching, WCCO reports today that

Stores are also hiring seasonal workers earlier than they have in years past, and in some cases, paying more. Target says anyone hired after Sept. 16 will begin at $12 an hour as minimum wage.

“They have to,” [Dr. George John, marketing professor at Carlson School of Management] said. “Unemployment is down, labor force participation is up. There are fewer people to go around, so you’re going to have to offer more money.”

John says potential applicants should take advantage of these openings.

“You will get employee discounts, a decent wage,” John said. “Apply to a number of places, see who wants you. Don’t wait ’til the season starts before you apply because everything has been moved up.”

As the price of labor rises, employers will switch from labor inputs to capital inputs; investment, in other words. But this, too, will help raise incomes. As capital per worker increases, workers become more productive and this enables them to earn higher wages.

This is the economy we should want for Minnesota; high investment driving rising wages. It is the economic model Germany had so much success with in the post-war decades. The state’s supposed ‘labor shortage’ should not be cause for panic and the pursuit of a labor intensive, low investment, low wage economy. Instead, it represents an opportunity to be grasped for a better economic future.

John Phelan is an economist at the Center of the American Experiment.

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