Labour Shortage? What's Happening to Wages?

When there is an "acute labour shortage", wouldn't you expect wages to rise to eliminate the shortage? [thanks to BrianF for the link]

PLANS to reopen one of Australia's largest goldmines have been abandoned because of acute labour shortages that are threatening to delay mining projects worth billions of dollars.
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[Prime Minister] John Howard expressed his support yesterday for a plan for a massive one-year migration rise of 20,000 skilled places, taking the overall intake to about 140,000 in 2005-06 -- the biggest quota in almost 20 years.

"We have an economic need at the moment for more skilled people. You can't generate them out of thin air in Australia," the Prime Minister said. "And if part of the solution to that problem is to bring in more skilled migrants then I am in favour of it."

We often see this type of concern from employers who expect and hope to be able to hire workers at some historical wage rate which is no longer relevant in a tighter labour market. When they are unable to do so, they then talk about an "acute labour shortage."

In economics, though, our models do not really like this concept since if there is a shortage at a certain wage rate, we expect wages to move upward. A major reason wages don't adjust instantaneously is that it takes awhile for people's expectations to adjust to changed market conditions. But they do adjust; it is only a matter of when.

And wages have, indeed, been moving upward in many occupations in Australia:

View Resources chief executive Derek Lenartowicz said wages were soaring as mining companies competed for the scarce pool of skilled workers available.
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Kalgoorlie-based WA School of Mines director Peter Lilly said mining engineer graduates in 2000 started work on $50,000 salaries, but those graduating later this year could look forward to signing up on salaries of $90,000.
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Mr Shanahan [of the West Australian Chamber of Minerals and Energy ] said the labour shortages were causing disruptions throughout the West Australian economy; farm hands were leaving the land for higher paying jobs in mining and mining companies were losing workers to the mine contracting firms.

"This shortage is rippling through the labour market, due to the skills shortage," he said.

It's nice to see our basic supply and demand models at work!