Investment and innovation can soften the blow of the ‘labor shortage’

‘Stretched for workers, Minnesota businesses lament immigration pushback’, the Star Tribune wrote on Tuesday. The story was a familiar one. As the state’s economy expands new jobs are created but there are too few workers to fill them. This poses a threat to continued economic expansion. The solution to the supposed worker shortage is increased immigration.

Economically, it isn’t as cut and dried as that. As I’ve written before, when someone says that the demand for workers outstrips the supply, what they really mean is that the demand for workers outstrips the supply at the current price. At some higher price, wages in this case, supply and demand will reach equilibrium. I’ve also written previously about how, if the price of labor rises too high, employers will switch to other inputs instead, capital inputs, such as machines, for example. This will happen whether the cause is a higher minimum wage or a reduced supply of labor. Either way, put these together and you see that one way we can escape the supposed economic doom which the alleged labor shortage will bring, will be for employers to switch to capital inputs instead.

Meanwhile, in Britain…

Much of the current debate in the US about the economic effects of reduced immigration echoes that in Britain. As the UK leaves the European Union, British agriculture is facing up to life with less cheap labor (or labour, as we call it over there).

As a recent article in The Economist notes,

The soft-fruit business has bloomed over the past 20 years. The production of strawberries, raspberries and other berries has increased from some 60,000 tonnes a year to over 140,000 tonnes, and these are picked almost entirely by migrant workers from the EU. In 2015 about 85,000 seasonal agricultural workers came to Britain, 30,000 or so of them to pick fruit. As a recent report by Andersons Farm Business Consultants concludes, without EU labour the sector’s recent growth “would not have been possible”.

As Britain prepares to leave the EU and probably end the free movement of workers from the continent, farmers are scrambling to find farm hands. But they are also exploring more rigorously the alternatives to a bountiful supply of cheap labour, such as using more automation and increasing existing workers’ productivity. 

The Economist notes the so far unsuccessful attempts to get British workers to fill the gaps. It goes on

Robots, on the other hand, are perfectly happy with such conditions, and are getting ever more dexterous at picking hard fruit, if not the squishier sort. Machines to pick strawberries and apples are already in use. They can pick at only about one-third the rate of a human, and farmers reckon that they miss about 15% of the crop. But they can make up for that by working 24 hours a day. They are expensive, though: one of the most popular strawberry-pickers costs about $250,000. Most farmers estimate that their large-scale deployment could still be a decade off.

In the interim, farms have been trying to wring more productivity out of their existing operations. Many have invested in metal tabletops to grow strawberries so that workers can pick them more quickly. Farmers now grow particular strains that produce more fruit over a longer season, such as ever-bearing strawberries. Others are spending more time on training their pickers. One farmer, Harry Hall, says that he has been able to improve his workers’ picking speeds by about 15% this year. Valya, a Bulgarian university student working on his farm in Twyford, 50km west of London, says that whereas she started out picking raspberries at 9kg per hour, after training she can pluck 11kg.

More investment and innovation is a good thing

I’ve written a couple of times recently (here and here) about how income per head grows. It does not come from adding more heads unless those heads are more productive than the average, as I’ve also written. The real sources of per capita growth are investment and innovation. If we have these then the alleged economic downside risks of lower immigration need not materialize.

The aim is to grow incomes per capita, not the capita. This is what matters for living standards. To illustrate this a little more, we’ll leave Britain and head to Bangladesh tomorrow.

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