Full employment, bargaining power, and wages for low-income workers

I had an article published in The Conversation this morning, with the headline "NZ has reached ‘full employment’ – but not all workers will benefit from a tighter labour market". The article lacks some of the theoretical background behind some of the points that I make, and that theory relates to things that I will discuss with my ECONS101 class later this trimester, so I thought it would be worthwhile to outline them in a bit more detail here. In particular, this bit:

When there is full employment, it starts to become more difficult for employers to find workers to fill their vacancies. We are seeing this already, with job listings hitting record levels.

A tight labour market, where there are relatively more jobs than available workers, increases the bargaining power of workers.

But that doesn’t mean workers have all of the power and can demand substantially higher wages, only that workers can push for somewhat better pay and conditions, and employers are more likely to agree.

This shift in bargaining power is why some employers are now willing to offer significant signing bonuses or better work conditions and benefits, including flexible hours or free insurance.

This is based on the underlying theory of a search model of the labour market. A search model recognises that each matching of a worker to a job creates a surplus that is shared between the worker and the employer. This surplus is the difference between the additional value that the worker will create for the employer, and the search cost (essentially, the cost of finding and hiring the worker). Because job matching creates a surplus, and the employer wants that surplus, the worker has a small amount of bargaining power, with the employer. This is because, if the worker rejects the job offer, the employer has to start over in looking for someone else to fill the vacancy and will face additional search costs.

How is the surplus split between the worker and the employer? It depends on their relative bargaining power. The worker will have relatively more bargaining power (and will capture more of the surplus) if search costs are relatively higher for the employer than for the worker - for example, if the employer would find it harder to find an alternative worker, and/or the worker could more easily find an alternative job. This happens when unemployment is low, or when the skill requirements of the job are high (so that few other workers could do the job). The worker will also have more bargaining power if the costs of remaining unemployed are low (so the worker doesn’t so much mind saying no to a job offer). This happens when unemployment benefits are generous, or when the stigma or negative psychological costs of being unemployed are low.

Now, coming back to the situation of full employment, the unemployment rate is low (in fact, as I note in the article, the unemployment rate is currently the lowest it has been since 1986). Employers are finding it difficult to fill vacancies, so search costs are high. Both of these are factors that give workers more bargaining power, as I noted above. Workers can leverage that bargaining power to get higher wages and/or better work conditions.

Does that mean that all workers will be better off? No, and this is the key point I make in The Conversation:

Many low-income workers are in jobs that are part-time, fixed-term or precarious. Low-wage workers are not benefiting from the tight labour market to the same extent as more highly qualified workers.

Nevertheless, a period of full employment may allow some low-wage workers to move into higher paying jobs, or jobs that are less precarious and/or offer better work conditions. That relies on the workers having the appropriate skills and experience for higher-paying jobs, or for increasingly desperate employers to adjust their employment standards to meet those of the available job applicants.

Low-income workers tend to also be working in jobs that do not have high skill requirements. That means that there are more other potential workers who could fill those roles. In other words, it is a bit easier for an employer to find a worker to fill a low-skilled vacancy than to fill a high-skilled vacancy. That means that, even in times of low unemployment, low-income workers do not necessarily benefit from greater bargaining power (as noted above, workers have more bargaining power when the skill requirements of the job are higher). Or, at the least, low-income workers do not benefit to the same extent that higher-income workers do.

And it gets worse. In the article, I didn't make the point that when the cost of living is high (as it is now), low-income workers may feel like they have little choice but to accept low wage offers, because the alternative (no job and a low job-seeking benefit) is so much worse. That isn't a consequence of full employment, but rather that even though benefit rates are indexed so that they increase as the cost of living increases, that adjustment is always playing catchup.

 So, as I conclude in my article:

Although a full employment economy seems like a net positive, not everyone benefits equally, and we shouldn’t ignore that some low-wage workers remain vulnerable.