One of the First Things You Learn in Economics 101 is Supply and Demand

Unemployment is low, and companies are making money. Like most economic theories, the ebb and flow of supply and demand under these circumstances should lead to bigger pay checks. But they aren’t. Why? Because when it comes to wages, other factors override economic truisms.

Supply is about how much of a product you have, and demand is how much of a product people want. If there is more demand than supply, prices should go up. If there’s more supply than demand, price is supposed to go down. Eventually they equalize into a sweet spot. Remember when people fought each other for Cabbage Patch Kids, Tickle Me Elmo, Beyblades and the latest Xbox? Every kid wanted one, driving up demand. Supplies were low because stores sold out. These two phenomena drove up prices. When demand went down, the prices also dropped.

Economists argue that supply and demand also determine wages. When unemployment is low, demand is high because there are not enough workers to fill every open job. Employers have to offer higher wages to recruit good workers.

Unemployment is the United States is very low—just 4.1 percent. This is close to “full employment.” Full employment is not really zero percent unemployment, it means that the economy is running smoothly and almost everyone who is looking for a job has one. That should be good—everyone who wants a job has one and wages should go up according to the theory of supply and demand.

But that’s not happening. Wages have been stagnant for 40 years. Annual year-over-year wage growth has been low since 2010. This means that supply and demand isn’t working—employers are not raising wages to attract the best workers. Why not? Here are a few reasons:

  1. Unemployment is probably much higher than reported. The way the official unemployment rate is calculated doesn’t count everyone who might want a job. Instead, the figure reflects people who are actively looking for work. Some people lose their job and spend so long looking for a new one that they eventually give up. Workers who need to work full time to make ends meet but can only find a part-time job or can only find a job that doesn’t pay enough are counted as employed.
  2. Unions raise wages, but union density has been on the decline. In 1983, 16.8% of the private sector workers were in labor unions. Today that figure is 6.5%. That decline in union density has translated into lower wages overall for workers in the U.S. When unions are strong, companies are willing to give workers a raise or even pay them at the union pay scale to try and keep workers from forming their own union.
  3. The minimum wage is too low. The federal minimum wage of $7.25 has not gone up in nine years. It’s purchasing power—the bills you can pay and the amount of stuff you can buy—is below what it was in the 1960s and 1970s. More than half of the workers making minimum wage are over 24 years old. It’s a real wage for working families, not the low wage meant for teenagers entering the workforce and learning job skills. The successful campaigns to raise minimum wages in states and cities to a more livable wage have boosted quality of life for millions of working families. Too many workers are stuck in minimum wage jobs.

While economists continue to tout the importance of supply and demand, it’s a sad statement that those vaunted rules don’t actually help real people. All of the “exceptions to the rule” seem to fall against working families, while the laws of supply and demand help corporations get richer, and richer and richer.

2018-02-20T00:46:02+00:00