Are the powerful retailers who set agricultural prices the real problem in keeping wages low?
We hear voices from agricultural sectors insisting that they face labor shortages. But how could it be? Surely all employers would have to do is raise wages, attract more labor to do this rather unattractive job, and that would clear the market.
So why don’t they do this?
The answer tells us a lot, not only about agricultural work, but modern labor markets in general.
Of course, two important factors in labor markets are supply and demand. In many commodity markets, if the supply of a good, such as bananas, decreases or demand increases, the price increases. And vice versa.
Likewise, it often happens that if the labor supply decreases or the demand increases, the wage increases. And vice versa. At least these are trends. But there are many other things happening. Imperfections and institutions make a big difference. And that can be more of a difference now than ever before.
Now the shortages strength reflect that there are not enough workers with the right training and skills. After all, public investment in technical and higher education has been reduced and undermined by privatization. The 2020-2021 budget provided for a real reduction of 22% in spending on “vocational and other education” between 2017-18 and 2023-24. The revelations of Victoria’s “scandalous TAFE system” a few years ago were just one example of the recent waste of public education resources.
But the agricultural situation is not about labor shortages caused by a lack of skills that cannot be easily taught by employers. No, most farm employers just won’t raise wages.
They are not alone. In many countries there is talk of a “labor shortage”, despite persistent unemployment.
In Australia a few years ago, employers in the retail and hospitality industry demanded that minimum wage penalty rates be to cut, so that more jobs can be established. The court granted the reduction, but there was no observable increase in employment in the sector. And since then employers have also complained about the work shortages in the area. But they won’t increase wages to clean up the market.
The lack of an employment impact of changing the minimum wage might surprise those trained in neoclassical economics, but it is consistent with evidence from a number of studies over the past two decades. These tend to show that the relationship between wages and employment is inconsistent, generally weak, and often not in the sense that the old notions of supply and demand would imply.
Why is this so?
In part, this is because there is a misconception about what happens in a freely functioning labor market. In the world of a perfectly competitive labor economy, full employment is always achieved because the supply of labor balances out with the demand for labor.
In less ideal but more realistic economic worlds: the number of jobs is determined by the level of consumption, not by wages; people in employment do not lower their wages when unemployment rises; and employers don’t ask them. People are not bananas. The price of bananas can drop when there is a surplus of bananas. Wages are not like that, regardless of unions or collective bargaining.
Indeed, there are a lot of factors that affect wages that don’t influence the price of bananas – institutions and imperfections, if you will. Banana vendors willingly change the price of bananas on a daily basis. Salaries do not change daily.
Bananas won’t taste bitter if you threaten them or pay too little for them. Bananas are not defined by their location in the fruit market or the way they are labeled. Bananas do not know how to organize themselves.
Bananas don’t starve if they aren’t bought. And even if they were starving, no one would care. Because bananas don’t vote.
And the banana markets are essentially absent from the monopsony.
What does “monopsony” mean? In its purest form, this is a single buyer. Just as “monopoly” refers to a single seller of a product, so monopsony refers to a single buyer. Here it is a single buyer of labor.
When you have a monopsony, that single buyer, or single employer, can buy labor at a lower wage and employ less labor than in the case of perfect competition.
In practice, there are not many labor markets where there is literally only one buyer. But restrictions on competition in labor markets allow companies to buy labor at lower wages than otherwise. Technically, it’s a “monopsonist competition”.
Whatever its name, the key idea in all of this is that employers have a choice as to the wages they pay.
There is not a single salary that employers must pay for a certain type of work, as in the perfect competition model.
On the contrary, employers choose, within certain limits, the salary they pay. If they pay less, they will have more vacancies and likely a lower quality workforce. If they pay a higher salary, they will have fewer vacancies, a better quality workforce with fewer defects, and higher labor costs.
Where they pay their wages depends on the niche market they are targeting with their products – the combination of price and quality they seek – their perceptions of customer demands, their tolerance for vacancies and, in fact, their personal preferences and beliefs.
I saw this kind of thing up close when I was in Thailand about 20 years ago studying their minimum wage system. In a factory that I visited, the employer was paying below the minimum wage (which he was not the only one to do). He complained about the difficulties in attracting workers and the laziness and low productivity of workers in the region.
Another employer, just down the street, paid workers better: minimum wage or above. He did not complain about labor shortages or the indolence of the workers.
It was as if there was an invisible barrier preventing the first employer (and many like him) from making the response you expect: raise wages to attract more workers and increase their engagement and retention. They were unwilling to increase wages to attract more workers because they did not want to increase the wages of their existing workers.
Yet if they had been forced to pay the minimum wage, they would have attracted labor and filled vacancies faster.
There is a lot of causes of monopsony.
Employers agree to prevent competition among themselves, through no-poaching agreements, or by forcing employees to sign non-compete clauses (to which around 18% of American workers are currently bound). This is something even Adam Smith wrote about.
And in most labor markets, some companies are simply bigger than others. Some companies dominate.
In addition, workers cannot move jobs transparently. Some vacancies are not visible. Even if the alternatives would be better paid, there are opportunity costs to finding employment and moving jobs. Child care can be difficult. Etc.
All of these obstacles increase the possibilities for employers to lower wages even further below a perfectly competitive market equilibrium level.
In the agricultural sector, one would think that there are a lot of employers, all competing with each other. But the most important factor is another monopsony: the power of large retail chains to dictate terms to vendors in the supply chain.
If an agricultural employer decided to pay higher wages to attract labor, which in turn meant that they were charging higher prices for their products, they would be rejected by the big retail chains. . They would be unable to sell.
The agricultural employer therefore chooses to offer low wages and to have a labor shortage. Indeed, it is the large retailers who choose the prevailing wage in agriculture, not necessarily by a conscious decision on wage rates (they may not even know what wages their suppliers are paying), but by their decisions on how their business model works.
This phenomenon also means that restricting immigration would not boost Australia’s current very weak wage growth. If restricting immigration were to increase wages in any part of the economy, it would be in agriculture, and not much has happened there despite the collapse in the supply of labor. backpackers.
While strong temporary migration may have contributed to slowing the growth of agricultural wages, it is not symmetrical, because this dynamic has created a new equilibrium, and supermarkets do not allow it to return. The equilibrium wage is not only shaped by the interaction of supply and demand, it is shaped by the interactions of power.
Just as wages in agriculture are kept down by the power of employers to decide wages directly or indirectly, wages in the rest of the economy would also be kept down. Higher wages will only come from high power for work, to challenge that power or the employers.
And with union membership at the lowest rate in a century and industrial relations laws designed to minimize the power of workers, this situation will not change in the near future.