Is Minnesota’s ‘labor shortage’ nudging wages higher?

‘Minn. worker shortage squeezing employers gets tighter‘, reported MPR News on Friday. This is that ‘labor shortage’ we have been hearing about in Minnesota. As the Star Tribune reports,

Vacancies at Minnesota employers climbed nearly 16 percent to a record 142,282, the state jobs agency said Friday, in another sign of the ultratight labor market.

The data came a day after the Minnesota Department of Employment and Economic Development reported the state’s unemployment rate dipped to 2.9 percent, the lowest since December 1999. Just 90,000 Minnesotans were unemployed in August, that report said.

Friday’s data showed that, for the three months ended June 30, the state had 0.6 unemployed people for every job vacancy, a record low. The job vacancy rate was 5.2 percent, meaning there were 5.2 openings for every 100 jobs in the state, a record high.

This ‘labor shortage’ or ‘ultratight labor market’, as I’ve written before, simply reflects that the demand for labor in Minnesota is rising relative to the supply. We are sometimes told that this represents a threat to economic growth in the state. But this isn’t necessarily so.

Economies don’t grow by becoming more labor intensive, but by becoming less so. Think of it from an employer’s perspective. If they want to produce Good X, they have a choice of whether to use labor or capital inputs to do so. As employers bid against each other for increasingly scarce labor inputs, their price – wages – increase. If the price of labor inputs rises too high relative to that of the capital inputs, it will make sense for the employer to use more capital inputs; in other words, to invest and become more capital and less labor intensive. And, as capital per worker increases, so should per worker productivity and earnings.

There are signs that this is already happening in Minnesota. As the Star Tribune notes,

Median pay for the vacancies was $14.54 an hour, up from $14.39 an hour a year earlier and $14.34 an hour at the end of 2017. Fifty-six percent of the vacant jobs in the latest period offered health insurance, the agency found.

As I wrote last week, this supposed ‘labor shortage’ represents an opportunity for the state’s workers to find higher wages. These increases will be sustainable, driven, as they are, by underlying economic forces, and not the wave of a legislative wand.

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