Labour market shortages and mobility

Kiwiblogblog raised the issue of labour shortages in New Zealand. As well as mentioning the labour shortages in New Zealand, they also stated that similar labour shortages exist overseas. Some of these shortages (eg doctors) have existed for a long time, all around the world. However, if this is the case why isn’t the wage rising to try and take care of these shortages?

When looking at this problem, the first issue that springs to mind is that doctors are skilled workers – therefore they need to spend time and money (with a significant opportunity cost) in order to become a doctor. However, once they have done this training, they can be subject to ‘hold up’ as the knowledge they have trained to learn in industry specific. Given this, the wage may not fully reflect the investment they put in to get the job in the first place and there will be an undersupply of doctors.

My first best solution would then have some sort of incentive contract between the prospective doctor and the hospital that they will work to go for. However, such a contract is likely not enforceable and is subject to too many information asymmetries to work.

As a result, the government may be able to intervene and subsidise doctors training – thereby reducing the cost of becoming a doctor and increasing the supply of doctors. However, because of labour mobility the government cannot ensure that the whole gain of paying for these doctors to get training will accrue to society – as some doctors will move overseas once they are finished. If this is the case, governments will ‘under-invest’ in doctors relative to the globally optimal level, as there are spillover effect to other countries.

If this is the case, then it makes sense that we have a global shortage in certain professions. The only solution I can think of off the top of my head is that the country that benefits by getting a doctor from the other country should pay for the investment cost of producing that doctor. This would convince governments to increase the subsidy for training doctors and lead to a more globally efficient outcome.

Do you guys have any ideas – or can you give me a better reason for why we have a global shortage of some types of labour?

  • CPW

    “hold-up” would suggest a lower wage and lower number of doctors than optimal, which would be a dead-weight loss, but that wouldn’t by itself be a shortage of doctors, would it?

    NZ has a shortage in almost every labour market, which doesn’t make any sense. AD > AS permanently and constant inflation? But most medical systems (globally) have shortages because the price is always below the marginal cost. NZ might be worse than most because supply response for doctors is sluggish, and (government funded) demand growth has been very strong over recent years.

  • ““hold-up” would suggest a lower wage and lower number of doctors than optimal, which would be a dead-weight loss, but that wouldn’t by itself be a shortage of doctors, would it?”

    Good point, I agree that I defined the problem poorly. However, as long as doctors can’t extract the full surplus from their investment decision there will be a ‘shortage’ of doctors in equilibrium. In a sense I might have to assume something like a social benefit in order to get that – which would be something the government would want to subsidise. In the case of mobile labour markets, the government does not receive the full return from its investment, and so will under-invest.

    “AD > AS permanently and constant inflation?”

    How do we measure ‘shortages’, that might go some way to explaining the discrepancy

  • We should be a bit careful about using the word shortage as it is often misunderstood. The nursing example I gave has been traditionally understood as a skill shortage, that is; an under-supply of appropriately skilled workers available at the general market price/wage. In fact, there’s no skill shortage, but there is a labour shortage – there’s something like 3 times as many registered nurses in NSW as their are jobs it’s just that they don’t want the work. Another factor in the nursing shortage relates to the availability of affordable housing and problems with transport. Sydney particularly has problems with a serious squeeze on rental property and a struggling transport system which means that many nurses can’t afford to live near the work and incur high transport costs.

    I make these points because I think we too often focus on wages as the solution to under- or over-supply but it’s far more complex than this.

    For a good discussion of the different kinds of shortage, check out this report by NILS labour economist, Sue Richardson

  • “I make these points because I think we too often focus on wages as the solution to under- or over-supply but it’s far more complex than this”

    My post wasn’t on wages – it was on whether labour mobility reduced the incentive for government to invest in skilled labour, so in a sense I was looking at one of the complications you are talking about.

    “In fact, there’s no skill shortage, but there is a labour shortage – there’s something like 3 times as many registered nurses in NSW as their are jobs”

    Whenever this is the case the labour mobility argument doesn’t not hold – as there is sufficient human capital avaliable, it is just not being allocated. Higher real wages would be a useful allocation mechanism here. The infrastructural problem are also important – however they should impact on all labour types.

  • Matt, I didn’t mean to suggest you were talking only about wages, I just wanted to make the point (which I’d made in my original post) that wages are not a complete solution.

    I agree that higher wages will assist but again there’s many factors in play as was pointed out in the research. In fact the real value of the research, from my perspective, is that it revealed how wasteful initiatives to increase the supply, through more training, were.

  • “is that it revealed how wasteful initiatives to increase the supply, through more training, were”

    Indeed, if we have a case like the one you mentioned with nurses then training is aimless – as the human capital already exists.

    If we have a case like that, we have to ask why these people are not choosing to participate in the labour market, which is what you were saying.

    However, when we do have cases where there are shortages of human capital, training devices can be useful – however, I suspect they will be under-allocated because of the ‘positive spillovers’ in other countries.

    Ultimately I think we agree that policy needs to be clear about what type of ‘shortage’ we are facing before we implement a solution.

  • CPW

    I guess hold-up could lead to shortages if the problem was that employers couldn’t credibly commit to not holding-up employees. What’s the answer to that, long-term contracts?

    Another more easily implementable response would be to bond doctors and nurses so that they had to repay their fee subsidies if they emigrate.

    “I make these points because I think we too often focus on wages as the solution to under- or over-supply but it’s far more complex than this.”

    I think we tend to use wages when we mean “overall job attractiveness”, obviously adjustment can come through non-monetary outlets. I’ve heard that the problems you mention are a factor in NZ too where the structure of public health contracts doesn’t allow for the regional variation necessary to attract people to places that are unpopular or with high costs of living.

  • “Another more easily implementable response would be to bond doctors and nurses so that they had to repay their fee subsidies if they emigrate.”

    Indeed, this would come up as a ‘contractual’ type solution – which is what I would like. I just wasn’t sure if it was particularly enforceable. If it is enforceable, then we could definitely set up some interesting industry training schemes.

  • “Ultimately I think we agree that policy needs to be clear about what type of ’shortage’ we are facing before we implement a solution.”

    Yes, we do agree. The word ‘shortage’ is often misapplied.