Weakening Demand for Work Increasing Prices for Final Consumers

Job growth in the United states is slowing, as interpreted from the nonfarm payroll data which came out in the past weeks. What could be the problem? In the subsequent discussion, I’ll cover the topic of labor in the current US environment and relate it to trade policy.

The payroll data reveals the number of hours worked has decreased due to less supply of labor—however, that’s not to say the economy doesn’t have jobs for them. Firms are looking for labor but can’t seem to find the quality they’re looking for. This could be due to firms not giving workers the right incentives to supply labor, or we’re dealing with a bunch of lazy people!

What does this mean for final consumers? Decreasing the labor supply will affect the prices of products because workers will then have a higher aptitude of working overtime—increasing the price of the product. In applying the Ricardian model, the price of a product is MPL • Ḹ = P. In a competitive market, wages are equivalent to the output of a worker. Firms hire workers until the value of one more hour of labor is equivalent to the amount of a good produced­ (from econ textbook). Let’s assume that the law of diminishing marginal productivity applies, i.e., marginal productivity decreases as production increases. If this were the case and they used less workers—with hours worked remaining constant—those workers’ outputs would be marginally less than if they hired more workers. This then increases the product prices because employers would pay marginally more for less output. In other words, if the workers are overworked, and fatigue causes them to be less efficient, they won’t produce as much.

In the sectors of retail and nondurable manufacturing we see this happening in the greatest scale. To reduce the effects of these two sectors we can rely on trade. If there are people leaving these sectors (either not working or switching sectors) then there would be no worry of negative trade effects. Employers could entice them to move to a different sector in which a greater allocation of resources can supply excessive output which the US can trade. This could be incentivized by export subsidies. However, this would worsen the TOT because the price of the exports would decrease--although it might get some talent working again.  

In conclusion a decrease in the average hours worked over a few sectors should, by applying the Ricardian model, predict that consumers will see a rise in the price of goods, resulting from less labor supplied. This, most likely will be passed onto final consumers in a couple of sectors which showed a decrease in the average hours worked this past year: retail and nondurable manufacturing. If this increases world trade due to government incentivized sector switching, then consumers will see a greater increase in prices because the goods exported will cost more domestically. All-in-all, consumers will have to break the bank or break the economy (save more).