North American workers wait for raises as job growth continues: Don Pittis

One of the simplest rules of economics is that when things are in short supply, prices rise enough to make the problem go away.

Yet as unemployment rates in Canada and the United Statesreachlows not seen for decades, so far, that rule seemsto have been broken.

In Canada, last week's employment figures showed thatin spite of repeated worries that a weaker economy will end the jobs boom, employers created 32,000 new ones, with full-time jobs replacing part-time work.

That is not far-fetched. Many economists say the continued departure ofbaby boomers from the economy will only increase the shortage.

The NAFTA advantage

President Donald Trump's war of words with China remains a risk for the global economy, but completing aNAFTAdeal will mean low unemployment in the U.S. will have a cross-border effect in Canada too, drawing on Canadian skilled labourto serveU.S. production.

And while the business press expresses worries aboutthe danger of rising wages leading to inflation, thesame basic economic theory tells us that increasing the price of things in short supply is good for the wider economy in two ways.

It forces the economy to produce more. And it makes business use those things more efficiently.

In parts of the U.S. and Canada,a worker shortage is becoming a reality. And so far the moderate wage increases that have been happening have not been enough to plug the gap.

"The crux of the problem is that we don't have the people here," a Midwest truck manufacturer told the Wall Street Journal in an article with the headline "Iowa's Employment Problem: Too Many Jobs, Not Enough People."

In parts of the Midwest, evenjob-skills training programs can't find unskilled labourers to train. Meanwhile, officials try to get more ex-convicts and disabled people into the workforce.

Supply and demand

"If the only way people will take a job is by paying them more, then that's the basic argument of supply and demand," said University of Waterloo labour economistStphanie Lluis.

When Canada's oil industry needed workers, it raised wages and drew people from across the country.

Not only that, raising wages when workers are in short supply makes the entire economy run more efficiently.

"The supply-demand argument will allow better allocation of workers into jobs," Lluis said.

In the case of the petroleum industry, theefficient allocation argumentis obvious.When oil was in short supply and prices were rising, high wages drew people from dying industries and marginal jobs to a highly productive sector.

It's well-known in the world of business thatthe rising cost of one ingredient in a process will encourage businesses to look for alternatives. Thesame thing applies to labour.

In that way, higher wages should also lead to innovations in robotics and innovation making the workforce more productive. Increased productivity where more goods and services are created with fewer workersis one of the holy grails of economics.

In past discussions, economists have tried to explain why wages don't seem to have budged, blamingfailed government policy,a lack of patience,a glut of discouraged workers and global wage competition from the developing world. Others have said a weakened trade union movement has made employers complacent.

Waiting for trade certainty

Economist Frances Woolleyhada few more suggestions aboutthe forces that may be holding wages down.

One example she offeredis Canadian companies that have trouble getting employees because they pay less than theirU.S. competitors.

"Canadian firms don't go and offer competitive wages," said Woolley, an economics professorCarleton University who specializesin government policy and labour economics."They say, 'Oh no, there's a labour shortage' and lobby for a program to bring in workers."

Another impediment to raising wages is that employers can't just raise wages to attract new workers and fill gaps. Woolley offeredthe example of the firm with 1,000 workers that needs 10 more.

In the oil industry, where the money was flowing and everybody got pay increases, wage differentials were enough to make people pull up stakes and move to a new job. Small wage hikes are less persuasive, she said.

"You could go out and pay a lot of money to get 10 more workers. Then those thousand workers would say 'Hey, wait a sec,'" Wooley said. It would end up costing the employer a lot more.

A resolution of NAFTAafter months of uncertainty may inspire confidence amongemployers, but new uncertainty caused by Trump's threat of atrade war with China may mean the beneficial effects of rising wages will have to wait.

Woolleypointedout that employers are wary of raising wages until they are sure the economy is stable and their markets secure. While offering a raise makes people a little happier, cutting wages oncethey've been handed outmakes employees very unhappy indeed.

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