Lack of Market Clearing in Labor Market
We’ve talked about market clearing prices in class mostly in terms of physical objects such as items that certain people want to buy that are valued at a certain amount. Doing so will help find an equilibrium price where we match a good or service to a consumer according to a perfect matching in the preferred-seller graph. Although we use this concept mainly for goods and services in a consumerism situation in lecture, we can also apply this to the labor market. In this case, instead of a buyer and an object, we have a employee and a employer who we match based on clearing the wages/sallery. Therefore, if the demand and supply of labor are equal, we can clear the market in finding an equilibrium wage to match employees to employers just as we would in the examples we worked in class.
However, in 2014, Roger Farmer argued that labor markets do not clear. He starts with saying that labor markets are often modeled “as if the wage always adjusts to equate the demand and supply of labor”. Farmer believes that this is not a good way to think about the labor market because we shouldn’t always assume that the supply and demand of labor are always equal or will adjust to be equal. Specifically, Farmer believes that employment varies with the business cycle which is not reflected when we still hold on to the assumption that demand of labor is equal to the supply of labor. People may leave or enter the labor market at any time and employees and employers may refuse their so-called match as well (unlike scenarios we work on in class, where the item cannot refused to be bought), making supply and demand for labor imbalance.
Frances Coppola adds that the labor market can clear but only when wages are so low that they fall below a sustainable wage. Coppola explains that when wages are that low, the labor participation rates would decrease as people fall ill or die. A reduction of the workforce would clear the market and wages would go up for those who are left. Due to wages being slow to adjust to changes in the labor market (a phenomenon known as sticky wages), we cannot get a market to clear until some sort of “stability” is reached in the labor market which is most likely when everyone is starving and struggling to survive. Therefore, Coppola argues that the labor market doesn’t clear because it can’t as Farmer would suggest, but it doesn’t clear “because we don’t want them to”.
Sources:http://rogerfarmerblog.blogspot.com/2014/03/labor-markets-dont-clear-lets-not-keep.html, http://www.pieria.co.uk/articles/why_labour_markets_dont_clear