Pearls and Irritations

Are powerful retailers who set farm prices the real problem in keeping wages down?

We hear voices from the agricultural sectors insisting that they are facing labour shortages. But how could that be?  Surely, all employers would need to do is raise the wage, to attract more labour to do that rather unappealing work, and that would clear the market.

So why don’t they do that?

The answer tells us a lot, not just about farm labour, but about modern labour markets in general.

Of course, two important factors in labour markets are supply and demand. In many product markets, if the supply of a good — like bananas — goes down, or demand goes up, the price goes up. And vice versa.

Likewise, it’s often the case that if the supply of labour goes down, or demand goes up, the wage goes up. And vice versa. These at least are tendencies. But there is a lot more that happens. Imperfections and institutions make a big difference. And it may be more of a difference now than ever before.

Now, shortages might reflect there not being enough workers with the right training and skills. After all, public investment in technical and further education has been reduced and compromised by privatisations.  The 2020-21 budget provided for a 22% real cut in spending on ‘vocational and other education’ between 2017-18 and 2023-24.  Revelations of Victoria’s ‘scandal-plagued TAFE system’ a few years ago were but one example of the recent squandering of public educational resources.

But the farm situation isn’t about labour shortages caused by some lack of skills that cannot be easily taught by employers. No, most farm employers just will not raise the wages.

They are not alone. There is talk in many countries of an ‘employee shortage’, despite persistent unemployment.

In Australia, a few years ago, employers in the retail and hospitality sector demanded that minimum penal rates in wages be cut, so that more jobs could be created. The tribunal granted the reduction, but there was no observable increase in employment in the sector. And since then, employers there have also complained about labour shortages in the sector. But they won’t raise the wages to clear the market.

That lack of an employment impact from changing minimum wages might surprise those trained in neoclassical economics, but it is consistent with the 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 small, and often not in the direction that old notions of supply and demand would imply.

Why is this so?

It is partly because there’s a misconception about what happens in a freely operating labour market. In the world of perfectly competitive labour economics, full employment is always achieved because labour supply equilibrates with labour demand.

In less ideal but more realistic economic worlds: the number of jobs is determined by the level of consumption, not wages; people in jobs do not drop their wages when unemployment rises; and employers do not ask them to. People are not bananas. The price of bananas might fall when there is a surplus of bananas. Wages are not like that, regardless of unions or collective bargaining.

Indeed, there are lots of factors that affect wages that do not influence the price of bananas – institutions and imperfections, if you like. Banana vendors readily change the price of bananas daily. Wages do not change daily.

Bananas will not taste bitter if you threaten or pay too little for them. Bananas do not define themselves in terms of where they are located in the fruit market or how they are labelled. Bananas do not know how to organise.

Bananas do not starve if they don’t get bought. And even if they did starve, nobody would care. Because bananas do not vote.

And banana markets are essentially absent of monopsony.

What does ‘monopsony’ mean? In its purest form, it is about a single buyer. Just as ‘monopoly’ refers to a single seller of a product, so monopsony refers to a single buyer. Here, it refers to a single buyer of labour.

When you have a monopsony, that single buyer, or single employer, can buy labour at a lower wage, and employ less labour, than would occur under perfect competition.

In practice there are not many labour markets where there is literally only one buyer. But restrictions on competition in labour markets enable firms to buy labour at lower wages than otherwise. Technically, it’s ‘monopsonistic competition’.

Whatever it’s called, the key idea in all of this is that employers have a choice as to what wages they pay.

There is not a single wage that employers must pay for a certain type of labour, as in the perfect competition model.

Rather, employers choose, within bounds, what wage they pay. If they pay a lower wage, they will have more vacancies and probably lower quality labour. If they pay a higher wage, they will have fewer vacancies, higher quality labour with fewer defects and higher labour costs. 

Where they pitch their wages depends on what market niche they’re aiming for with their products — what combination of price and quality they are after — their perceptions of customer demands, their tolerance for vacancies, and indeed their personal preferences and beliefs.

I saw this sort of thing up close when was in Thailand a couple of decades ago, studying their minimum wage fixing system. In one factory I visited, the employer was paying below the minimum wage (not something he was alone in doing). He complained about difficulties in attracting workers and about the laziness and poor productivity of the workers in the area.

Another employer, just down the road, paid his workers better: at or above the minimum wage. This one had no complaints about labour shortages or worker indolence.

It was as if there were an invisible barrier preventing the first employer (and many like him) from making the response you would expect: increase wages to attract more workers and increase their commitment and retention. They were unwilling to raise wages to attract more workers because they did not want to raise the wages of their existing workers.

Yet if they were forced to pay the minimum wage, they would have attracted labour and filled vacancies more quickly.

There are lots of causes of monopsony.

Employers connive to prevent competition between them, through non-poaching agreements, or by forcing employees to sign non-compete clauses (which about 18% of US workers are presently bound by). It’s something even Adam Smith wrote about.

And in most labour markets, some firms are just larger than others. Some firms dominate.

Moreover, workers cannot move jobs seamlessly. Some vacancies are not seen. Even if the alternatives would be better paid, there are opportunity costs to job search, and to actually moving jobs. Childcare might be difficult. And so on.

All these barriers increase employer opportunities to lower wages further below a perfect-competition market-clearing level.

In the agricultural sector, you might think that there are many employers, all in competition with each other. But the biggest single factor is another monopsony: the power of the big retail chains to dictate terms to sellers in the supply chain.

If an agricultural employer decided to pay higher wages to attract labour, and that in turn meant they charged higher prices for their produce, they would be shunned by the big retail chains. They would be unable to sell.

So the agricultural employer chooses to offer low wages, and have a labour shortage. In effect, it’s the large retailers who choose the wage prevailing in agriculture, not necessarily thorough a conscious decision about wage rates (they might not even know the wage their suppliers pay), but through their decisions about how their business model operates.

This phenomenon also means that restricting immigration would not boost Australia’s current very low wage growth. If restricting immigration was to boost 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 backpackers.

While high temporary migration may have helped drag agricultural wages growth down, it’s not symmetric, because that dynamic has created a new equilibrium, and the large retailers won’t allow it back up again. The equilibrium wage is not just shaped by the interaction of supply and demand, it is shaped by the interactions of power.

Just as wages in agriculture are held down by the power of employers to directly or indirectly decide on wages, so too would wages in the rest of the economy be held down. Higher wages will only come from high power for labour, to challenge that power or employers.

And with union membership at the lowest rate in a century, and industrial relations laws tailored to minimise any power workers have, that situation will not change in the near future.

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