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Unemployment and labor shortages—at the same time?

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Frank Augstein / AP / File

(Read caption) Jobseekers sit and wait at an employment agency's office in Duisburg, western Germany, in this 2005 file photo. In some sectors of the German labor force, there is a shortage of workers. Guest blogger Stefan Karlsson writes that raising wages would help with the problem.

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A New York Times article claims that as unemployment in Germany has reached the lowest level since 1992, it now suffers from the opposite problem of labor shortages.

But first of all, at 7.4%, unemployment is still significantly above the level of unavoidable frictional unemployment. Labor markets have functioned with unemployment rates more than 5 percentage points lower, so there is no general labor shortage yet.

It could however be the case that a few sectors suffer from a shortage of workers with the right skills, even as unemployment is high in other sectors. The best solution to this is to educate the unemployed in other sectors so that they can work in the sectors which suffers from shortages. Encouraging older workers in the sectors with shortages to stay on the job longer and removing restrictions for foreign workers with the right skills in those sectors would also work.

Amazingly, the article overlooks the most obvious and effective solution to labor shortages, which as it happens would help (that of course, doesn't mean that one can't use other ways to achieve these solutions) with regard to all the three solutions discussed the previous paragraph: higher wages.

As in any market, a shortage is a sign that the price, in this case the wage level, is too low. Raising pay in sectors with shortages would encourage people to get the needed education to work there, it would encourage older workers to stay on longer and it would encourage foreign workers with the right skills to move to Germany (though in most cases they would have to educate themselves too, only in this case in the German language).


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