The supply and demand model of the labour market suggests that changes in wages in one labour market will affect other labour markets. For instances, when the wages in Labour Market A are higher than in Labour Market B, workers will tend to shift from Labour Market A to Labour Market B. In a recent illustration of this effect, this Wall Street Journal article (paywalled) reports:
For years, factory jobs paid significantly more than those in many other fields, especially for less-educated workers. That is changing, according to economists, manufacturers and federal data.
Take Western Michigan, home to many office-furniture and car-parts factories as well as a growing tourism industry. Restaurants and hotels along Lake Michigan have been hiring rapidly as people, kept fairly stationary during the pandemic, start traveling again...
Haworth has raised wages at factories near its Holland, Mich., headquarters to $15 an hour, plus another dollar for the night shift. It has amenities like a 24-hour gym as well as annual Thanksgiving turkey and Christmas gift giveaways. Haworth still isn’t finding enough workers. That could hold back production at a time of red-hot demand for furniture, vehicles and many other consumer goods.
Some workers recently left Haworth’s factory in the nearby town of Ludington for hospitality jobs, Ms. Harten said. Haworth is advertising assembly jobs for $14 at that facility—the same starting pay rate at a nearby Wendy’s restaurant. “Manufacturing can be taxing,” said Ms. Harten, who also believes enhanced Covid-19 unemployment benefits are discouraging some people from taking open jobs."
We can illustrate these effects using a model of the supply and demand of labour. Consider the two labour markets illustrated below. On the left is the labour market for manufacturing jobs, where demand for labour has remained constant (D0), and wages were initially W0. On the right is the labour market for hospitality jobs, where demand for labour has increased from DA to DB ("Restaurants and hotels... have been hiring rapidly..."). This increase in demand increased wages in the hospitality labour market from WA to WB, and increased the number of hospitality workers employed from QA to QB. That makes hospitality jobs more attractive, due to its higher wages, and because workers can avoid some of the negative characteristics of manufacturing jobs ("manufacturing can be taxing"). As workers move into the hospitality labour market, that increases the supply of labour in the hospitality market from SA to SC, pushing wages back down to WC, but increases the number of hospitality workers employed further, to QC. It also decreases labour supply in the manufacturing labour market from S0 to S1, increasing wages from W0 to W1 ("Haworth has raised wages at factories... to $15 an hour"), and decreasing the number of manufacturing workers employed from Q0 to Q1.
Taking this model too literally would lead you to expect that the wages would be the same in all labour markets, since workers would move around, pushing down wages as they enter markets with high wages, and pushing up wages as they exit markets with low wages. However, there are several reasons why this doesn't happen, including compensating differentials (such as the taxing manufacturing work, which means that workers will want to be paid more in that job before they want to move into that labour market), and human capital differences (some jobs require specific skills or experience). However, even though wages are not the same across all labour markets, changes in wages in one market can still have ripple effects through to other markets.
[HT: The Dangerous Economist]
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