The shearer shortage and the price of winter woollies

The New Zealand Herald reported this morning:

A shortage of shearers has cost farmers this coming summer, with kiwi and Aussie shearers stuck on the other side of the Tasman due to closed borders.

It's not just shearers but also shed hands and wool handlers that could be in short supply.

A shortage is a situation where the quantity demanded exceeds the quantity supplied. That means that the current market price is below the equilibrium price. That is illustrated in the diagram below. The market price of shearing services is P0, which is below the equilibrium price of P1. [*] At the market price, the quantity of shearing services demanded is QD, but the amount of shearing services available (the number of shearers wanting to work) is only QS. The difference between QS and QD is the shortage of shearers.

What happens next? If you are a sheep farmer, and you want your sheep shorn, there is a good chance that you aren't able to find a shearer because of the shortage. One way for you to solve the problem is to contact a shearer, and offer them more money to shear for you, so that you won't miss out. Other farmers are going to be doing the same though, so effectively, the sheep farmers bid up the price of shearing services. This continues all the way to P1, where the quantity of shearing services supplied is equal to the quantity of shearing services demand (and both are equal to Q1). Interestingly, this is exactly what the New Zealand Herald article anticipates:

With a looming labour shortage farmers could see the price per sheep go up compared with last season.

"Obviously people have got to pay what they have got to pay to get people and you are all fighting over a small labour market"

The increase in the price of shearing services will have a flow-on effect onto the market for wool. This is shown in the diagram below. The supply curve shows the costs of production of the sheep farmers. An increase in the price of shearing services increases the costs of production of wool, and shifts the supply curve up (and to the left) - what we refer to as a decrease in supply. The equilibrium price of wool will then increase from P0 to P1 (and the quantity of wool traded will decrease from Q0 to Q1).

This then flows onto the costs of production of items that are made of wool. Higher wool prices increase the costs of production, decreasing supply and increasing the price (the diagram is the same as the one for the wool market, above). So, the shearer shortage is going to cause your winter woollies to increase in price. Thankfully we're heading out of winter!

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[*] Arguably this is a labour market, and so we should refer to the price as a wage. However, since most shearing is undertaken by contract firms, I've opted to show this as a services market instead. The implications are the same regardless of whether this is a market for services or a labour market.