Thursday, October 27, 2011

The Price of Unskilled Labour

Bearing in mind the ongoing chaos in Europe, and other major stories, I am guessing that this post might appear a little odd. It relates to a single story, which is the problem of recruiting labour for farm work in Alabama. I do not know the agricultural sector well, let alone the sector in the US, and I therefore add this as a caveat for my discussion and my conclusions. However, I think it is worthwhile plunging on as (even if there are specifics that might confound my case) I think the principles still apply. I will quote the start of the story at some length:

Alabama farmers are facing a labor crisis because of the state's new immigration law as both legal and undocumented migrant workers have fled the state since the strict new rules went into effect last month.
So far, piecemeal efforts to match the unemployed or work release inmates to farm jobs are not panning out, and farmers are asking state lawmakers to do something before the spring planting season.

Farmer Guiseppe Peturis has a small operation — growing mostly vegetables on his family's 20-acre farm in Belforest, Ala. — and selling them on the corner in front of his house. His retail business has suffered since he appeared on the local news saying Alabamians don't want to do hard farm work.

Peturis says he's a Republican, but is no fan of Republican Gov. Robert Bentley's plan to get jobs for out-of-work Alabamians by passing the nation's toughest immigration law. Among other things, it calls for police to detain suspects if there's reasonable suspicion they are in the country illegally.

Peturis says he's tried to hire through the state unemployment office before, but didn't have much success.
"Two of them left in 30 minutes; didn't even tell us they [were] going to leave," Peturis says. "One worked an hour and says it was too hard on his back."
There are many ways to approach this simple story. One approach would be to note that the local workers are simply too lazy to do hard work, despite horrendous levels of unemployment in the US. From this, we could present a story of lazy rich country workers who think that the world owes them a living, who are not willing to get on with work, but would choose living on hand-outs rather than doing hard work. It is a tempting approach, and was my first reaction to the story.

However, I then thought back to a time when I finished my degree and had some time to fill between starting my first job. I needed money to tide me over and worked for a little while as a building labourer. I discovered the meaning of hard physical work. I can safely assume that working as a labourer on building sites remains just as hard. I also note that there is not the same kind of discussion of the necessity for immigrant labour to allow the building trade to continue. I also remember that, when I chose the labouring job, I chose it because it paid considerably more than, for example, bar work.

When I thought about this story, it occurred to me that perhaps the real problem is that the pay being offered is simply too low for the level of hard physical work that is required. The farmers have become used to being able to pay low wages to immigrant workers, and have not accepted that they must simply pay more for local workers. This means that the farmers costs must go up, and that means higher food prices. However, set against that, the demand for government hand outs would be reduced with the resultant drop in unemployment and there would be more tax paid to the government.

Nevertheless, there is an element of the first approach to the story that remains. It is that presumably unemployed people are choosing hand outs over working for low wages which they do not think compensate them for the demands of the work.

Although this story at first seems to be straightforward, it is actually discussing some of the complexities of trying to understand the real operation of an economy. The availability of migrant labour has seemingly allowed farmers to pay lower wages than local people would accept. This in turn has impacted upon the cost structure of agriculture, such that the expectations for the prices asked by farmers are, in part, determined by this cost structure. I do not know the details of the Alabama law that is referred to in the story, but it seems that Alabama has 'gone it alone' with regards to cracking down on migrant labour. This in turn leaves the Alabama farmers with a problem with their costs in relation to the competition.

The real problem therefore is not that Alabama has restricted access to migrant workers, but that it has acted alone. I suggested earlier that Alabama farmers had not accepted that they must pay more, but it is probably a case of them being unable to pay more without making a loss. The real question is to ask what would happen if migrant labour were to disappear across the whole of the US? If this were undertaken, if migrant labour was unavailable, the story from Alabama suggests that the wages for agricultural labour would have to rise to compensate for the hard work involved. This would lead to inflation in food prices, and therefore lead to a rise in the broad measure of inflation, and a fall in unemployment.

However, there are other potential consequences that might confound this scenario. For some kinds of produce, there is the potential for competition from other countries. Would the increase in costs in the US agricultural sector then lead to an increase in imports of produce? If so, it might be that, in paying higher wages to the local workers, the farmers would still face competition and might lose in that competition.

The real question here is about the cost of labour in the US. The problem is that, where there is potential for competition for imports, the cost of labour really matters. The problem is that, if labour is a large element of the input of a good or service, then the low cost countries are likely to win in competition. The agricultural sector has survived competition by importing relatively low cost labour i.e. labour that is willing to work for lower wages than local labour. The result of this is that there is cheaper food, but higher unemployment. Remove the immigrant labour, and agricultural wages will rise, and unemployment will be reduced. However, this might take place at the cost of certain sectors of agriculture going out of business, with a negative impact upon the balance of trade, and possibly a negative impact upon unemployment to offset the positive gains. 

As I said, this appears to be a simple story, and simple narratives could be wrapped around the story. However, it illustrates some of the problems in a world economy where there is greater competition between unskilled labour, even if it is not always obvious that the competition exists. There are some elements in this story which much of economic theory does not really capture, such as the idea that people think that there is a fair price for hard physical labour, rather than a market price determined by supply and demand. The supply of unskilled labour is large, with any unemployed person who is not disabled able to do the work. Nevertheless, it seems that this labour has a sense of a 'fair' price for this kind of hard physical labour so that, even though there is an oversupply of labour, the price of that labour must rise in order to access that pool of labour. Supply and demand does not explain this.

What appears to sit underneath the entire story is the cost of labour. I have made a case in this blog that the massive input of labour into the world economy has created what I have termed hyper-competition.  However, it appears that the story about the Alabama farmers appears to be an illustration of how the oversupply of labour is creating a situation of hyper-competition, at least in some agricultural sectors. The curiosity is the response of the unemployed US people, who simply think it is unfair to be paid so little for such hard work. As much as it would be nice to be paid higher wages, is it possible/realistic? Is it confronting the reality of the situation of hyper-competition? Can the US afford to keep people so many people unemployed? If my take on this story is correct (and again I highlight the caveat), then the story is a hard illustration of the problems that have come with the growth in the world labour force.


  1. OK, I know knowing about the US benefit system. But couldn't the attitude of unemployed people in Alabama be strictly rational? Depending on the rules and the taper, someone on benefits taking a low-paid job could in effect face a marginal tax rate near the 100% mark. This would account for their choices without any need to suppose a belief in a 'fair' price for their labour. Illegal migrant workers, presumably not being eligible for benefits in the first place, might be facing a marginal tax rate at or around zero. In the circumstances, both groups would be acting rationally. Trouble is, the local workers could only be given a good reason to accept low-paid work by either extending benefits to people further up the income scale or by cutting benefits to those who currently get them. At least one of those things ain't going to happen.

  2. Anonymous, you are quite right. It is one of the points I made in 'A Funny View of Wealth' (the first post on the blog). It is a factor that I considered mentioning, but I nevertheless think that the overall argument still stands; that there is a perception of a fair wage for hard physical labour e.g. if it was shop work at the same pay level as the agricultural labour, would they not take the job (or even remain in the job as per the example in the article).

  3. To me this suggests the existence of a cushion, or an buffer zone. This buffers zone has been fattened up in recent decades by 'consumerism now'.It is so fat, in fact, that workers will not work. Nothing, but hardship, will force the workers to breach their buffer zones of comfort. But in the present world, why should lower paid workers be asked to breach their buffer zones, when it is plan for them to see that workers higher up the wage scale have yet to reach the same stage. My opinion is that people will behave fairly only when the rules are applied across all social stratas. (Not fairly applied, too idealistic, but be seen to be applied, and accepted as such). There must come a time when the breaching of peoples comfort thresholds will happen due to price increases. Unfortunately this will normally start at the lower end of consumerism, i.e. food and basic needs and services.

  4. Just as a side note, the U.S. has a H-2A visa category for temporary agriculture workers. I don't believe there are any limits to how many workers can be brought in annually. However, this visa is not very popular with employers since they need to meet certain requirements regarding wages and housing for the workers.

  5. What many politicians and economists fail to factor into their theories is 'people'. You can have carrots and sticks and still people don't do as expected.

    In terms of lower paid jobs, some people might do them because they are only a temporary job, before something else they intend to do, or to raise a bit of ready cash, or maybe they are also benefit cheats etc. Some genuinely do them to survive because they have no option, like the illegal immigrant.

    However, a lot of people are just downright fed up with their own personal situation. They know, that they personally have no skills, they aren't too bright and are therefore destined to spend their lives toiling away for a pittance. They know that no matter how hard they work they will never really better themselves, because they just don't have the ability to do so.

    With even just subsistence level benefits available, they probably think it is better to live poorly and not work, rather than work their socks off to be only slightly better off.

    If you reduce their benefits them some may decide to work and some may just decide to live like beggars, tramps and thieves. None of these people will be happy and end up a seething mass of discontented people waiting to have a riot and a looting spree. They end up in poor deprived areas like the townships in South Africa and various other slums around the world.

    America and Europe couldn't tolerate that scenario and therefore when push comes to shove they prefer to keep benefits relatively high, so these people don't cause too much trouble or risk becoming proper revolutionaries.

    When everyone is poor, people accept being poor, but when they see a whole lot of rich people about as in America then they get fed up with their lot, jealous, angry, disenchanted etc.

    The more high tech and developed the economy becomes the harder it is for this strata of society to work their way upwards and so generation after generation just stagnate, seemingly not giving a damn.

    I'm not sure there is actually a way out of this kind of societal structure. Politicians may shout "education, education, education" but
    it doesn't actually solve the problem, as there will always be people who just can't make the grade and therefore give up.

  6. I live in Florida, where Alabama-styled legislation has already been proposed. Agriculture is an even bigger sector in our economy. You've hit the nail on the head, in terms of labor/wages. Our other big low-skill industries are tourism and construction, where the work is also hard, but the wages considerably higher, as you noted. I do believe you'd have more unemployed locals willing to do farm work if it paid like construction work and I think you'd have the same problem finding construction workers at similar wages. We have, however, had a massive rise in illegals on the construction sites for the very reason that it brings down those wages and reduces price points at a time of scarce building demand. In agriculture, you would most definitely face increased foreign competition were prices to come into balance with the proper wages and most of the farms would likely go away, especially because of our lax trade policies. In construction, that would be less of an issue, but we are really seeing an instance where hyper-competition is depressing wage growth for the vast majority of workers, making them not only unlikely to pay more than the artificially lower price of such goods, but unable. The average U.S. consumer is so leveraged that their ability to pay for goods and services is so limited, that demand begins to shrink as soon as prices rise and businesses face a hard time staying viable. Many of these things were not taken into consideration with respect to trade policies, immigration enforcement, etc., as the world rapidly globalized and as a result the normal roles of supply and demand for both goods and the labor that produces them do not have an immediate enough effect to cause balance. In the U.S., we are living with the products of 3 decades of deregulation, flawed tax policy that promoted unhealthy inequality, questionable trade policy and unsustainable deficit spending, the results of which have only been staved off and ultimately compounded by our unique ability to settle trade imbalances in our own fiat currency. I don't see a viable solution for what we would call a correction of this sort of economy.

  7. You've put it correctly: absent cheap labor, some of these businesses might simply go under.

    But what must also be considered are the considerable externalities of illegal migrant labor. Not only do "undocumented" migrants often require social services from the United States; their children also require public-school education and numerous other social services.

    These costs are not borne by the farmer. They're borne by all taxpayers. So, in exchange for cheaper food, Americans pay much more in taxes (or see a great decline in quality of service) in order to carry the extra economic burden.

    You can see the results: schools and hospitals in California are sagging under the load. And there's very little upward mobility, on average, among Latino immigrants, despite many individual tales of success.

    If we wanted to preserve our farms for sentimental reasons or for ones of national security, it would surely be better to subsidize them overtly, perhaps by supplementing the wages they offered to American citizens legally able to work.

    As it is, the ordinary consumer and citizen gets his wages affectively garnished in order to maintain a very unpleasant system of exploiting people in the U.S. illegally. And the new laborers simply cannot, despite all their hard work, pay in nearly enough to counterbalance what they take out.

  8. Further news on this


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